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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Mantis

Wouldn’t you need to subtract from the cost of MSR the value of the points you are earning from MSR spend? So the opportunity cost may be 3%, I’d agree with that, but let’s say the MSR card earns 2% on all purchases, so your cost of MSR is really only 1%.

Greg The Frequent Miler

The value of points earned through meeting minimum spend are part of the formula

SamL

I believed the following should have 0.0057 instead of 0.57

Estimated cost of minimum spend requirement: $48.60 (1 x $2,000 x 0.57 – $2000 x .03)

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Mary mix

Chase

[…] that end, you can read this post that explains more about where we get our first year values. In a nutshell, first year value looks at the value of the welcome bonus points based on our […]

[…] Despite the problems with certs described above, I previously found that 50K certs are worth about $300 each towards free nights (see: What are Marriott 50K certificates worth?).  For the purpose of estimating the welcome offer’s first year value, though, I estimated each night to be worth $250 in order to be consistent with past precedent (see: Credit card signup bonus estimation details). […]

[…] Despite some personal cards having best-ever offers, business cards have continued to top our overall “best of the best” list which is sorted by estimated first year value.  As a reminder, we estimate first year value for each card by estimating the welcome bonus value and subtracting out both the first year annual fee and the opportunity cost of spend to meet minimum spend requirements (see this page for details). […]

[…] we show credit card offers and estimate first year value (see: Credit card signup bonus estimation details), we do not include bonuses that are received in the second year.  So, the signup bonuses for […]

Aloha808

Is it really fair to set the opportunity cost at 3%? Relatively few people have a 3% back card. An opportunity cost of 2% seems much more reasonable.

Greg The Frequent Miler

Great question. I originally used 2% but that caused a problem: cards with rewards above 2% looked better if they had high spend requirements. This was a big problem with SPG cards back in the day. Today, take the Chase Ink Biz Unlimited as an example. It earns 1.5 points per dollar and our UR RRV is about 1.5 cents per point. So, it earns about 2.25% in rewards per dollar spent. If that card had a $30,000 min spend requirement (instead of the current $3,000), and if we used 2% opportunity cost, then the first year value for the version with the $30K spend requirement would be higher. It would look like a better offer because the $30,000 spend would generate more value than the 2% cost of spend.

It’s not ideal, but I decided to deal with this by basically saying “you could sign up for a first year 3% card and put the money on that instead” so that’s where we get the opportunity cost. If you have a better solution, please let me know!

Aloha808

Thank you for the fast responses! The discover it miles card is used as an example, but I don’t think it’s an appropriate example in this case, because, let’s be honest here, it’s not really a 3% back card. It’s a 1.5% back card with a matched 1st year spend SUB. I can think of a few reasons why the SUB shouldn’t be included to make it a 3% back card: you have to wait a year to get the rewards (much longer than any other issuer), & if we’re including the SUB might as well also compare against cards with higher SUBs for less work, &finally after the first year the card is strictly 1.5% back which forces one to sign up for the card again to continue getting 3% back (thereby taking up a valuable 5/24 slot and HP, waiting another year to get 3% back, etc).

Lastly, if the discover it miles were such an appropriate example, do any of you hold and use it? Most likely not, for the reasons just stated. The card can be quite rewarding, but it’s not really a 3% back card. Otherwise we’d have *bigger*% back cards to compare against.

On the other hand, 2% back is plenty fair because many folks have 2% cashback cards, which don’t require some kind of special trick to maintain (i.e. reapply). Since this is for the public I’m not considering BoA platinum honors status. If you want to compare against the Double Cash, Ink unlimited, or Freedom unlimited cards when redeeming for travel, I suppose that’s fair, but it’s still less than 3%back. I personally don’t value them that highly for the purposes of an opportunity cost, since many times you’ll have to keep the rewards on hold until you plan on redeeming them whenever that is (which has its own costs).

I mean we’re looking at reasonable redemption values right, not most conservative redemption values. So, to answer your question Greg, I think the best solution is to give credit where credit is due, and compare against what one would reasonably expect to get in return from another card they’d already have. If that’s 2%, 2.25%, or 2.5% back, I can see the arguments for each, just not 3%.

To sum it all up, not really fair to compare against cards which force you to wait forever to get the reward, use a special trick to do so, and which few of us have. An opportunity cost comparison should be apples to apples, as much as possible.

Edit: as an example, suppose a card has a $5k MSR which you meet, giving you 5k points in about a month, and those points are worth $75. You could compare that against spending on a card you already have which will give you $100 back in a month, or compare it against a different card which you’re forced to sign up for and which will give you a total of $150 back, but you’ll have to wait a year to get it. I know which one I’m going for, the one that’s less of a pain in the behind.

Greg The Frequent Miler

I totally get what you’re saying but in my opinion using anything less than 3% doesn’t do enough to “punish” offers that require very high spend.

Telnar

My leaning would be to set the opportunity cost at 2.5% (the highest long-term option for cash back which doesn’t require a large investment), but use that only to punish offers on cards with a return below 2.5%. Cards with a long-term return above 2.5% (mainly AMEX BBP and 2x Capital One cards) can treat their high return as a benefit of membership and their minimum spending counts as “free” since it might have occurred voluntarily.

I’m not convinced the high minimum spend offers on cards with good return on spending need additional punishment beyond making that minimum spend clear (so that only those willing to spend that much consider them). They just shouldn’t get a bonus for the high minimum spend.

Josh

Might want to increase opportunity cost to around 5%, given current deal of chase freedom unlimited

Nick Reyes

The purpose behind the methodology is to be as conservative as possible. To that end, since anyone can get the Discover It Miles card, the most conservative possible opportunity cost estimation is 3%. If your opportunity cost is less, first your value is even higher. Truthfully, first-year value should be higher in many regards since we are also conservative on point valuations and estimated value of any first-year benefits. Up again, our aim is to be conservative so as to not artificially inflate / overstate the value of any card. You should reasonably expect our first year values *or more*.

[…] 3% cash back since there are a number of ways to do that in the first year as an alternative). See this post for more on how those calculations are determined. The short story is that we try to be as objective as possible in determining the value of offers […]

[…] At a very high level, we estimate first year value by adding up the value of the signup bonus plus statement credits (if any) and subtracting out costs such as the first year annual fee.  With points and miles, we use Reasonable Redemption Values (RRVs) to estimate their value.  Full details of how we calculate Estimate First Year Value can be found here: Credit card signup bonus estimation details. […]

[…] find current offers with low spend requirements.  Offers are sorted by our formula for estimated first year value.  And, as a reminder, we always strive to show the best public offers even if it means that we […]

[…] statement credits and free night awards for the purposes of determining first year value (See: Credit card signup bonus estimation details and Unbiased credit card rankings: a work in progress). That said, I figured it was worth looking […]

Edward Klar

What card gives 3% cash back?

Greg The Frequent Miler

Discover It Miles first year (then drops to 1.5%). Also the Alliant Visa Signature first year (then drops to 2.5%)

[…] Regular readers know that we maintain a sorted list of the Top 10+ Credit Card Offers (the “+” means that you can click “Next” to see beyond 10).  The offers are sorted by an estimate of first year value.  For details aboujt how this is calculated see: Credit card signup bonus estimation details. […]