After years of ignoring all those requests for free airline miles for signing up for a new credit card, I finally decided it did not make economic sense to ignore the offers. American Express has really sweetened their offers, likely because since they lost all their Costco members, they are seriously looking for cardholders.
Thinking about it, I decided to break it down to a bet. American Express (Amex) offered my 60,000 miles for signing up for a card. If you assume a mile is worth roughly a penny, that’s $600. So why is American Express so willing to part with $600? Lets assume the actual cost to the airline is around $300. I have no idea what the margin is on airline tickets, so lets just use 50% for this example, If I buy a ticket using miles and the seat would of been empty anyway – it costs the airline very little. But lets just assume the airline dings American express for $300 for driving traffic to this airline.
So, Amex thinks they get at least $300 of benefit by giving me a card. I normally wouldn’t get an American Express card, as not everybody takes American Express – for good reason. If I were a merchant, I wouldn’t take American Express, since they typically charge upwards of 1% more to the merchant than Visa or MasterCard. So with apologies to merchants everywhere, if I spend their required $3000 on the Amex card, they are getting $90 in credit card fees from me. Also, after the first year, they charge $90 for the card. So if I keep the card for over a year, and spend roughly $7000 on the card, lets assume they break even.
Amex of course hits the jackpot if I carry a balance on the card or am late on a payment, so that’s the real gamble here. They don’t know that I have very few firm rules in life – but one of them is to not carry a balance on a credit card – that is fiscal suicide. They card around 25% annual interest on balances, in an environment where we get 1% on our savings. Gee – even bankers can make money with that kind of spread.
So I took them up on my gamble, picked up the miles, and just purchased an airline ticket using the miles and saved $600 on the price of the ticket.
So so far – so good. I have a process in place to manage the process, and track when my annual fees are due. I also need to take a look at what opening these new accounts does to my credit, as that would be a hidden cost here if that is impacted. I would not recommend everybody do this – it takes work to track all this, and in some sense you are playing with a fiscal bomb if it backfires on you. So be aware this is not a free offer in the economic sense.
So who wins this bet? I am going to say both me and Amex. I currently plan to keep using the card for this year, and getting my miles balance back up to where I can get another ticket. Amex gives me 1 mile for every $1 spent, which is roughly what my other cards give me for general purchases. So I will use this as my primary card, until the year is up, then likely cancel if they try to charge me an annual fee. So if I hit the $10,000 on that card this year, they essentially break even.
So as much as I was hoping to take advantage of stupid bankers.. it turns out they might end up benefiting them also. I guess I will have to be satisfied with just shrinking their margins.