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Recently I published a series showing how to earn airline, hotel, and car elite status through credit card spend rather than travel. In those posts I described how to earn status through spend, but did not touch on whether or not it is a good idea. Let’s examine that question today…
For review, here are the posts detailing how to earn elite status through spend:
- How to manufacture Hilton Diamond status
- How to manufacture Marriott elite status
- How to manufacture Delta elite status
- How to manufacture United elite status
- How to manufacture Hertz elite status
Out of pocket cost
The goal of manufacturing spend is to increase credit card spend with as little out of pocket cost as possible in order to earn credit card rewards. Some techniques are completely free (e.g. loading Serve online, loading REDbird in-store, etc.), while others involve fees (e.g. federal taxes cost at least 1.87% to pay by credit card). Many techniques have less obvious costs. Consider, for example, wear and tear on your car, and more frequent gas fill-ups for those frequent trips to Walmart. And, all techniques involve your time. If you enjoy manufacturing spend as a hobby you might not consider your time to be a cost, but if it means spending less time doing things you truly want to do, or less time earning money through other means, then it should factor into your thinking.
Anytime you manufacture spend, its worth considering the value you get from it in exchange for your time and fees. Several blogs recently tackled this subject. Miles To Memories summarized a couple of posts, and added his own point of view, here: Manufactured Spend Return On Investment – Do You Account for your Time? It’s worth a read.
Assuming you’ve decided that manufacturing spend is worth it to you — that the value you receive is worth your time and fees – there is still another important consideration: could you do even better? Let’s take a simple example: one could use a 1.5% cash back card to load $5000 to a REDbird card every month for a year. Since REDbird has no fees, the earnings in exchange for time on task can be calculated easily: $5000 x 1.5% x 12 months = $900. That sounds great until you consider that one could just as easily have used a 2% cash back card instead. With a 2% cash back card, the same approach would yield $1200 in a year. That’s $300 more than with the 1.5% card. So, one can say that the opportunity cost of using the 1.5% card compared to the 2% cash back card, in this example, is $300 per year.
Opportunity cost calculations become more complicated when earning points, miles, and elite status. In order to calculate opportunity cost, its necessary to understand how much the points, miles, and elite status are worth to you.
Benchmark: 2% cash back
I’ve long believed that 2% cash back is a good comparison rate for calculating opportunity cost. To be fair, there are a few cards that offer better than 2% cash back (see: Best rewards for everyday spend), but they have various limitations: they require large deposit balances, they’re available only in certain locations, they have high annual fees, and/or earnings can only be used effectively for certain types of travel. There are also cards that offer significantly better than 2% rewards within certain categories of spend (see: Best category bonuses), but those cards are not effective for all types of manufactured spend. For example, if you used a card that has a 5% grocery store bonus to buy Visa gift cards at a Simon Mall, you would most likely earn only 1% cash back. Also, most such bonuses are limited in various ways (e.g. first 6 months of card membership, max earnings per quarter or per year, etc.). Meanwhile, 2% cash back cards such as the Citi Double Cash card, the Fidelity Investment Rewards card, and the Capital One Spark business card have no such limitations. And, both the Citi Double Cash card and the Fidelity Investment Rewards card are fee free.
Should the annual fee be considered an opportunity cost?
While it’s not 100% true, it’s mostly true that costs associated with manufacturing spend are the same regardless of which credit card you use. So, when calculating the opportunity cost of manufacturing spend with a Delta Reserve card compared to a 2% cash back card, we don’t need to include the costs of manufacturing spend in those calculations. The costs should be the same with either card (with a few exceptions, such as opportunities where Amex cards are not accepted). That’s not true of the card’s annual fee, though. The Delta Reserve card, for example, costs $450 per year. The Fidelity Amex is free. That said, the Delta Reserve card offers many valuable benefits just for having the card: SkyClub lounge access, free bags, enhanced upgrade priority, free companion pass, etc. Are those benefits worth the annual fee even if the card is not used to manufacture spend? In my case, I think so, but the answer will be different for each person and each card.
If you do not value the credit card’s benefits on their own, then I think it makes sense to include the annual fee in your opportunity cost calculations. If you value the benefits as much or more than the annual fee, then I recommend leaving it out of your calculations. For the rest of this post, I’ll assume that card benefits are valued as much or more than the annual fee, but keep in mind that you may not value the card’s benefits that highly.
Opportunity cost applied to manufacturing status: Two examples
Manufacturing Hilton status
With either of two Hilton cards (Amex Hilton Honors Surpass or Citi Hilton Honors Reserve), one can manufacture top tier Diamond status by spending $40K in one year. The opportunity cost of that spend compared to a 2% cash back card is easily calculated: 2% of $40K = $800. That’s how much a person would earn by spending $40,000 on a 2% cash back card rather than a Hilton branded card. $800 sounds like a lot to lose in exchange for Diamond status, which is arguably barely better than Gold status (an automatic perk of the same credit cards). That said, you do earn points and more for that spend, in addition to Diamond status:
Hilton Honors Surpass:
- 3 to 6 points per dollar spent (depending on how much manufactured spend was at grocery stores) = 120,000 to 240,000 points. I value Hilton points at about .4 cents each (see: Fair Trading Prices), so the value of the points can be thought of as being between $480 and $960.
Hilton Honors Reserve:
- 3 points per dollar spent = 120,000 points = approximately $480 worth of points.
- One free weekend night (earned with $10K spend annually) = ?
The idea of earning 240,000 points by manufacturing spend at supermarkets sounds great until one realizes that the 2% benchmark should then probably be replaced with 5%, since it is possible to earn 5% at supermarkets. Or, at least, compare to 3% since there are some cash back cards that offer 3% cash back at grocery stores, uncapped. If we compare to 3%, then the opportunity cost rises from $800 to $1200.
It is due to calculations like these that I haven’t yet tried to earn Hilton Diamond status through spend. Unless you value Diamond status at more than a few hundred dollars, or you value Hilton points more than I do, I don’t see manufacturing Diamond status as a great opportunity. In this analysis, the value of the earned points and status are maybe equal to the opportunity cost. That’s not enough, in my book. As a rule of thumb, I believe that you should value the earned points and benefits much more than the opportunity cost, to make it worth doing.
For more details about manufacturing Hilton Diamond status, please see: How to manufacture Hilton Diamond status.
Manufacturing Delta status
There are two cards that can be used to manufacture Delta elite status: the Amex Delta Reserve card and the Platinum Delta SkyMiles card. For simplicity, let’s look at the Reserve card:
- Earn up to 30,000 MQMs (Medallion Qualifying Miles) every year:
- With $30K calendar year spend: earn 15,000 MQMs and 15,000 redeemable miles
- With $60K calendar year spend: earn another 15,000 MQMs and 15,000 redeemable miles
- Unlike the Delta Platinum card, MQMs earned with the Reserve card are giftable. This means that you can apply the MQMs to a different person’s account (or they can apply their earned MQMs to your account)
To earn 30,000 MQMs with this card (which is more than enough to get Delta Silver status or well on your way to Gold status), one would have to spend $60,000 in a calendar year. The opportunity cost of that spend, compared to a 2% cash back card, is $1200. In addition to MQMs, though, you also get:
- A total of at least 90,000 redeemable SkyMiles (60,000 from spend + 30,000 from big spend bonuses). At the Fair Trading Price of 1.29 cents each, 90,000 redeemable miles is arguably worth $1,161.
Consider also the following partial list of elite benefits:
- Unlimited complimentary upgrades (when available, upgrade from coach to first class on domestic flights). Higher status leads to better chance of upgrades.
- Waived same-day confirmed fees and waived same-day standby fees (switch to different flight on same day as ticketed flight). Requires Gold or higher.
- Complementary economy comfort seats (more leg room!). Requires Gold or higher for domestic flights; Platinum or higher for international flights.
- Free award changes and cancellations. This is huge because it lets me book awards when I see availability even if I’m not sure I’ll take that particular flight. Requires Platinum or higher.
- Regional upgrade certificates. Puts you to the front of the line for regional upgrades. This is great to use for flights where upgrades are most important to you. For example, I use these for flights of about 4 hours or longer. This is a choice benefit for Platinum and Diamond status.
- Global upgrade certificates. These are fantastic. Use these to upgrade from coach to business class on any international flight when upgrade space is available. My wife is 4 for 4 this year in applying her certificates and getting the upgrade. This is a choice benefit for Diamond status only.
The amount you value the above perks should be based on how often you expect to fly Delta, how much you value upgrades, etc. Another option is to estimate the value of each MQM. I’ve tackled this question in the past and came up with an estimated fair trading price of 3 cents per elite qualifying mile. Please see: How much should you pay for Elite Qualifying Miles? Taking that estimate into account, $60,000 of spend on the Reserve card results in:
- 30,000 MQMs worth 3 cents each = $900
- 90,000 redeemable miles worth 1.29 cents each = $1,161
- Total estimated value: $2,061
From that point of view, manufacturing Delta elite status appears to be well worth the $1200 one would have earned from a 2% cash back card. I can’t stress enough, though, that the real value varies tremendously from person to person.
For more details about manufacturing Delta elite status, please see: How to manufacture Delta elite status.
For now I’ll leave it to the reader to work out other comparisons (Marriott elite status, United status, Hertz status, etc.). The key is simply to calculate the opportunity cost (2% of total required spend) and compare that to the value of the earned benefits (points or other perks earned from spend plus the value of the earned status perks). It’s important to estimate the value of the points and perks from your perspective. One good way to think about it is to ask yourself how much you would really be willing to pay for those points and perks. The answer should be significantly less than the actual savings you expect to get from using those points and perks. For example, if you think you would save $1,000 in travel from the earned points, it would not make sense to buy those points for $1000. Why trade an extremely flexible currency (money) for a chance of saving that much with an inflexible currency (points)? In that example, an estimate of $500 is probably more appropriate.