Credit card welcome bonus estimation details

In order to rank credit card offers from best to worst, we estimated the first year value of each credit card’s welcome bonus.  This methodology does not take into account benefits one would get from each card through daily spend or from perks available to credit card holders other than those explicitly offered as part of the new cardmember bonus.  One exception: many annual statement credits (often offered for airline fee reimbursements) are counted as part of the credit card’s first year value.

For each credit card on our Best Offers page, we’ve estimated the card’s first year value as follows:

(Estimated value of bonus points + Estimated value of other bonuses)

Minus

(Estimated cost of minimum spend requirement + first year annual fee)

Estimated value of bonus points

Here we used the latest Reasonable Redemption Values (RRVs) to estimate the value of each point and then multiplied by the number of bonus points offered.  RRVs are the value at which it is considered reasonable to get this much value or more per point.  See this post for more information about RRVs: Airline Miles are worth 1.4 cents each. A simplified approach to Reasonable Redemption Values (note that we have since changed the RRV values, but this post is still a good primer on the concept).

Example:

  • Reasonable Redemption Value (RRV) for IHG points = 0.57 cents per point (at the time this was written)
  • The Chase IHG card sometimes offers a 80,000 point intro bonus
  • Estimated value of bonus points = 80,000 X 0.57 = 45,600 cents = $456.

Estimated value of other bonuses

We count three types of credit card bonuses and perks in addition to bonus points:

  • Free nights (or other free things) given as part of a welcome bonus
  • Statement credits given as part of a welcome bonus
  • Statement credits available each year (in which case, we count only the first year credits)

Estimating the value of free nights:

We estimate hotel free night certificates by taking the maximum point value of the certificate and multiplying by a fudge factor to account for the fact that free night certificates are less valuable than points (certificates expire in a year or sooner, certificates are less flexible in how they can be used, etc.).  For Hilton and IHG certs we use an 0.85 fudge factor.  For Hyatt and Marriott, we use a slightly worse fudge factor of 0.8 in order to account for the fact that each has severe limits on how they can be used (i.e. Hyatt certs can't be used for higher category hotels and Marriott certs cannot be used at hotels that cost more than 15,000 points above the cert's top amount).
Certificate Reasonable Redemption Value Calculations
Hilton $490 120K points (even though some Hilton hotels charge more) multiplied by Hilton RRV ($0.0048) multiplied by a fudge factor (0.85).
Hyatt Cat 1-4 $252 15K points (based on standard pricing rather than peak) multiplied by Hyatt RRV ($0.021) multiplied by a fudge factor (0.8).
Hyatt Cat 1-7 $504 30K points (based on standard pricing rather than peak) multiplied by Hyatt RRV ($0.021) multiplied by a fudge factor (0.8).
IHG 40K $214 40K points multiplied by IHG RRV ($0.0063) multiplied by a fudge factor (0.85)
Marriott 35K $224 35K points multiplied by Marriott RRV ($0.008) multiplied by a fudge factor (0.8)
Marriott 50K $320 50K points multiplied by Marriott RRV ($0.008) multiplied by a fudge factor (0.8)
Marriott 85K $544 85K points multiplied by Marriott RRV ($0.008) multiplied by a fudge factor (0.8)

More about the fudge factors:

  • Hilton: 0.85 (these are the least restrictive certs since they are uncapped and can be used any day of the week)
  • Hyatt: 0.80 (Unlike with Marriott or IHG, Hyatt doesn’t allow adding points to book higher category hotels. On the other hand, Hyatt’s certs work just as well with hotels that are peak priced as those that are standard or off-peak)
  • IHG: 0.85 (these have the same fudge factor as Hilton certs because IHG allows adding an unlimited number of points to book more expensive rooms)
  • Marriott: 0.80 (While Marriott offers the ability to add points to top-off a free night certificate, they cap this ability at 15,000 points per night)

Statement credits:

We discount the value of statement credits if they are difficult to obtain.  In general, we follow these rules:

  • Assign full value to any statement credit that requires credit card spend less than or equal to the credit card’s intro bonus minimum spend requirement.
  • Assign 90% value to airline fee reimbursements that are available to use for a full year or that are easily obtained by buying a gift card online.
  • Assign 75% value to fee reimbursements that are limited to 3 to 6 months and require spend directly with the credit card co-brand (e.g. requires direct hotel or airline spend), and there are known easy ways to get the reimbursement without travel (such as buying gift cards from the hotel or airline).
  • Assign 25% value to fee reimbursements that are limited to 3 or 4 months and require spend directly with the credit card co-brand, and there are no known easy ways to get the reimbursement without travel.
  • Assign no value to fee reimbursements that seem especially difficult to obtain.

Estimated cost of minimum spend requirement

The cost of the spend requirement is estimated by assuming that the cardholder would have put the same amount of spend on a 3% cash back card if they hadn’t signed up for this card.

The cost of the minimum spend requirement is calculated as follows:

Value earned from spend (Points earned per dollar X Minimum Spend Requirement X RRV)

Minus

Opportunity cost of spend (3% of Minimum Spend Requirement)

Let’s flesh out the IHG example:

Value earned from spend: 1 point per dollar X $2,000 min spend X 0.57 RRV = 1,140 cents = $11.40

Minus

Opportunity cost of spend: 3% of $2,000 = $60

= –$48.60

A complete example

Remember that the overall calculation for each card’s first year value is:

(Estimated value of bonus points + Estimated value of other bonuses)

Minus

(Estimated cost of minimum spend requirement + first year annual fee)

Let’s now look at the best IHG credit card offer at the time of this writing (the IHG Premier Card): Up to 85K points: 80K after $2K spend in 3 months + 5K for adding authorized user.  $89 annual fee not waived first year..

Next, let’s calculate each of the components of the above equation:

  • Estimated value of bonus points: $484.50 (85000 bonus points X 0.57 / 100)
  • Estimated value of other bonuses: None (this is where we would account for a $50 statement credit for example)
  • Estimated cost of minimum spend requirement: $48.60 (1 x $2,000 x 0.57 – $2000 x .03)
  • First year annual fee: $89

Now, let’s put it all together:

$484.50 + 0 – $48.60 – $89 = $346.90

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