The two cent rule of credit cards: If you’re not earning more than 2% back, you’re doing it wrong.

“Plane” and simple if your credit card isn’t yielding at least a 2% return on all of your spend…it’s time to get another credit card. Why? Because there are simple, straight-forward, cashback credit cards that yield 2% back on your purchases, and thus, that’s your opportunity cost if you choose to use anything else. Most people don’t understand this, and ultimately leave a lot of money on the table.

If you’re using a card that earns points or miles, those points or miles need to net you more than 2% otherwise, you’d be better off going cashback.

Here are a few cashback credit cards that earn 2% back

• Personal
  • Citi Double Cash® Credit Card
    • 2% back on all purchases without a cap
    • No annual fee
  • Wells Fargo Active Cash
    • 2% back on all purchases without a cap
    • No annual fee
  • Bank of America Premium Rewards
    • 1.5% back on all purchases; however, if you have over $100k in BofA deposits ( including retirement ) you get 2.625% back on all purchases.
• Business
  • Capital One Spark Cash Plus
    • Unlimited 2% back on all purchases
    • $150 annual fee – so this actually is a  bit under 2% because you have to account for the fee.
  • American Express Blue Business Plus
    • 2x Membership Rewards on all purchases up to $50k, 1x on purchases thereafter
  • American Express Blue Business Cash
    • 2% cashback on all purchases up to $50k, 1x on purchases thereafter

How you should calculate the return you’re getting with your credit card.

The amount that you’re getting back on you credit card is a little harder to calculate since points all have different values and credit cards now come with a lot of benefits that everyone values differently. But… here’s some questions you need to answer in order to properly value your credit card.

The Simple Method:

This doesn’t take into account any of the fringe benefits you’re getting on the card, or whether you get certain credits that help you offset the fee.

• How many points did I earn in a year?
• What did I spend to earn those points?
• What was my annual fee?

(( Total points x Value of Points ) – Annual Fee) 

/ 

 Total amount of money I spent

The more Complex Method that includes credits and benefits

• How many points did I earn in a year?
• What did I spend to earn those points?
• What was my annual fee?
• What benefits did I use?
  • Car Rental Insurance, Lounge Access,
• What credits did I use?
  • Hotel credit, Travel Credit, Airline Credit, Dell, Uber, etc
• Did I get any free nights, elite miles, etc
  • Does the card come with a free night? Did you spend enough to get a free night?

Everyone is going to value the above differently. Some will value a $200 Amex Fine Hotels and Resort credit as $200, others will say it’s only worth $100 to them. This is up to you.

I then use this formula

(( Total points x Value of Points ) + Value of benefits Used + Value of Credits + Value of Nights – Annual Fee) 

/ 

 Total amount of money I spent

 

What are my points worth?

Everyone values their points differently, and there is a litany of explanations on how they arrived at a specific valuation. I tend to think of these factors:

• All bank points that transfer are worth a minimum of 1.5 cents; however, Wells Fargo primarily transfers to partners whose own points can be purchased aroudn 1.5 cents. Amex, Bilt, and Chase are hands down the best points and I’ve valued them on par with one another ( you could wiggle this ), and Citi and Capital One are worth a bit less since they don’t have as many domestic transfer partners.
• Hotel and Airline points can almost always be purchased… most of my valuations are based off the lowest price they’ve been sold, or aside from Covid fire sales, the lowest price per point they’ve been sold.

Since I value things differently than other sites, I am showing you 4 other sites valuations and then using an average.

Clearly you can see from the chart, universally the best points are transferrable bank points which hover around the 1.5 to 2 cent mark.

How many points did I earn?

Most card issuers will give you a card breakdown of how many points you’ve earned in a year. Let’s take a look at a card of mine. You could also go back a year in statements and see what your balance was and compare it to what your balance is now and calculate it that way.

What did I get back on my purchases? My Cents Per Point…CPP

Since July 2023, my Chase Ink Business Preferred has earned just over 68k Ultimate Rewards; however, only 28,177 were earned from purchases, so that’s what we will use. I spent $16,031 over the past 10 months. I could prorate the annual fee, but let’s just say I spent that in a year to make that math a bit easier.

I’m going to use $0.0208 ( you can see how I got that valuation down below ).

( Total points x Value of Points ) + Value of benefits Used + Value of Credits + Value of Nights – Annual Fee  /   Total amount of money I spent = CPP

( 28,177 x $0.0208 ) + $0 + $0 + $0 – $95 / $16,031 = CPP

or

$491.08/$16,031 = $.0306

I’d likely get even more value than this because I usually extract more than 2.08 cents out of Chase Ultimate Rewards, but this is how I go about thinking about it. Clearly I’ve outdone the 2 cent hurdle of cashback.

Why putting spend on Airline and Hotel credit cards can lower your Cents Per Point

Delta’s CEO bragged that nearly 1% of the US GDP was processed on Delta cobranded credit cards. This is rooted in a misunderstanding of the value of points and miles, and doesn’t mean you shouldn’t have airline and hotel credit cards, but rather that the value of them is held in the benefits and credits, not the points that you’re earning.

The main caveat I’d make to that statement is that often using an airline or hotel credit card with the brand can make sense value wise because they usually have a bonus attached to brand spend. For instance, a Hilton Aspire earns 14x at Hilton properties. I value Hilton Honors at 1/2 a penny a piece, but that’s still 7 cents back on every dollar you spend if you use that card. Even the Chase Ink Business Preferred® or Chase Sapphire Reserve® 3x spend on travel doesn’t hit that ( though you may prefer the flexibility of those points compared to locking in Hilton Honors )…I’m just making the point that they can provide competitive value at the brand.

Example: Delta SkyMiles® Gold American Express Card

Let’s say you have this credit card and spend $20k on it per year and earn 22,000 points. The card earns at the following rate, so a small fraction of your purchases had a category bonus attached. You also took 5 or 10 Delta flights where you took advantage of Main Cabin 1 boarding and the first checked bag free benefit….that’s worth $350. Let’s say you also booked a hotel through Delta Hotels and made use of your $100 credit as well.

The earn rate for the card is:

• Earn 2X Miles on Delta purchases, at U.S. Supermarkets and at restaurants worldwide, including takeout and delivery in the U.S.
  • Earn 1X Miles on all other eligible purchases

Calculating your CPP with spend and 5 flights:

• Total Points earned in a year: 22,000
• Total spend: $20,000
• Average Value of Delta SkyMiles from chart: $0.0116
• Annual Fee: $150
• Benefits:
  • 5 first checked bags – $150
  • 5 flights with Main Cabin 1 boarding…$25
• Credits:
  • Value of $100 Delta Hotel Stay Credit: $100

22,000 x $0.0116 = $255.6 + $150 + $25 + $100 – $150 = $380.6

Divide that by $20k = $0.0193 ( You’re below the 2 cent threshold )

Calculating your CPP with spend and 10 flights:

• Total Points earned in a year: 22,000
• Total spend: $20,000
• Average Value of Delta SkyMiles from chart: $0.0116
• Annual Fee: $150
• Benefits:
  • 10 first checked bags – $300
  • 10 flights with Main Cabin 1 boarding…$50
• Credits:
  • Value of $100 Delta Hotel Stay Credit: $100

22,000 x $0.0116 = $255.6 + $300 + $50 + $100 – $150 = $555.20

Divide that by $20k = $0.02776

You can see that you’d need more than 5 flights to break the 2 cent mark; however, almost all of that is derived from the benefits and credits because as a cardholder you fly Delta a lot. The points you’ve earned are actually worth $255.6 on $10k spend… just $0.0116, and the rest of the credits and benefits are yours without spending a dime.

If instead you just put that spend on an American Express Everyday Preferred at 1x you’d earn the following:

The CPP holding the Delta Gold but Spend on Amex Everyday

• Total Points earned in a year: 20,000 Amex Membership Rewards
• Total spend: $20k
• Average Value of Amex Points from chart: $0.02
• Annual Fee: $150 ( Delta Card ) + $95 Amex Every Day Preferred
• Benefits:
  • 5/10 first checked bags =  $150/$300
  • 5/10 flights with Main Cabin 1 boarding = $25/50
• Credits:
  • Value of $100 Delta Hotel Stay Credit: $100

5 flights

20k ( $0.194) + $150 +$25 + $100 – $150 – $95 = $423

Divide that by $20k = $0.02115

10 flights:

20k ( $0.194) + $300 +$50 + $100 – $150 – $95 = $593

Divide that by $20k = $0.02965

You’ve increased your rate of return in either scenario and now have 20k Amex points which can be transferred into 20 different partners including Delta. This is also assuming that you don’t earn any category bonus points which would add more Amex points to your balance.

Recap

If you utilize this formula and the card you’re using is netting you less than a 2% return on your purchases, at the very least, I’d consider pivoting your spend to a card that earns transferrable points from Amex, Bilt, Chase, Capital One, Citi, or Wells Fargo – these points are all quite valuable.

Personally, if a card has an annual fee over $95, I look at the value of the credits and benefits of a card to erase the annual fee and then some. That way, I know I’m already net ahead, and the 2% hurdle is solely coming from the cumulative points I earn across categories, and nearly all my spend is put on cards that earn transferrable points, and my blended average number of points per dollar is 2x.