Determining the best credit card for your needs goes well beyond choosing the card that offers the most cash back or points when you sign up. In order to get the most value out of a credit card, it’s important to consider other features such as the annual fee and the rate of rewards you earn when you use the card. Calculating the best card for the average American consumer means taking all these elements into consideration.
So what’s better – a larger sign-up bonus, a higher rewards rate, or a lower annual fee? Let’s compare the best rewards credit cards based on the average consumer’s monthly spending (based on numbers from the Bureau of Labor Statistics) and see which scenario offers a better return.
In our examples, we have used the average monthly spending with the assumption that you hold the card for approximately three years. Your earnings and experience could vary.
A High Introductory Bonus
The intro bonus that a card offers new members can contribute a great deal of value to the total profitability of the card. The best cards on the market currently offer bonuses of as much as 50,000 miles, that are worth anywhere from $500-$750 when you redeem them.
However, with high sign-up bonuses come higher-than-average annual fees. Some of the things to consider when choosing a card with a high sign-up bonus include the following:
- Will you be able to qualify for the bonus without racking up extra debt? The best cards require spending as much as $3,000 in the first three months of cardmembership. If you have to spend more than usual or cannot meet the requirement without living above your means, the bonus may not be worth it.
- How long will you keep the card? By itself, the value of the sign-up bonus will decrease over time. The longer you keep the card, the lower the value of the bonus. For example, if you divide a $500 sign-up bonus over five years, it adds $100 to your annual rewards. In some cases, it may not be worth paying an elevated annual fee, especially if the card costs you hundreds of dollars every year that you carry it.
Cards offering the largest sign-up bonuses include:
Chase Sapphire Reserve
If you sign up for this card at a Chase branch by March 12, 2017, you can still qualify for the best credit card sign-up bonus in history – 100,000 points, which is worth 1.5 cents each if you redeem them for travel on the Chase website. The value you get from this bonus, based on our estimates looks like the following:
- Regular spending will bring $423 rewards every year
- Introductory bonus of $1,500
- Annual fee of $450
In this example, your total three-year rewards value left after paying annual fees will be about $1,419.
Additionally, with this card, you will get a $300 annual travel credit, so if you spend that much in travel every year, your total three-year rewards value will be around $2,319.
To make these attractive numbers work though, you need to be able to spend at least $4,000 on the card in the first three months in order to qualify for the intro bonus, which is typically not a problem for the average consumer.
Note, that if you apply after March 12, 2017, your intro bonus will be just 50,000 points, so your total three-year rewards value will be only $1,569, which still might be worth considering.
Barclaycard Arrival Plus™ World Elite MasterCard®
With this card, your sign-up bonus and value looks like this:
- Annual rewards of $408
- Sign-up bonus will cost $500
- Annual fee will be $89 (waived for the first year)
Total collected rewards in three years minus the annual fee will be $1,546.
Considering the Rewards Rate
The rewards program is often the most important factor when considering a good cash-back or travel credit card. Some of the best rewards cards are the ones that offer the highest flat-rate rewards on all purchases. These types of cards are especially convenient as well because you don’t have to keep track of quarterly rotating categories or special purchase categories when you shop.
Good examples of valuable flat-rate rewards cards include the following:
Capital One Venture Miles Rewards card
This card offers unlimited 2x miles on every purchase. The calculation for determining if this card is right for you looks a little like this:
- $408 in annual rewards
- $400 sign up bonus
- $59 annual fee starting in your second year
With the Venture Miles Rewards card, the total rewards value after the annual fee in three years will be $1,506.
Fidelity® Rewards Visa Signature® Card
This card is another great flat-rate card and is a low-cost 2% cashback card. In three years, you could earn approximately $1,224 in rewards. When you add in the $100 sign-up bonus, you can earn a total rewards value of $1,324 in three years.
5% Cash Back Cards
Although flat-rate rewards cards are convenient, you could earn more rewards with cards that focus on specific spending categories. Some of these cards offer up to 5% rewards on selected purchase categories. This may sound great, but keep in mind that these cards usually lose to the flat-rate 2% cards unless you spend extraordinary amounts in the 5% cashback categories and are diligent in signing up for the high rewards categories every quarter.
A good example is the Discover it card, which awards a whopping 5% cashback on rotating categories each quarter and doubles your cashback at the end of the first year. The rewards rate and the sign-up bonus together make this card an obvious winner.
Let’s take a look at the numbers.
- Annual rewards rate is just $276
- Plus a double cashback bonus for your first year
The total rewards for three years with the bonus would be $1,104.
What About a Lower Annual Fee?
The annual fee is the parameter that can greatly affect your rewards in the long run. Most of the high-rewards cards charge an annual fee, but some of them waive it for the first year, which can save you hundreds of dollars and allow you to earn rewards and bonuses without it costing you.
Credit cards with an extra-high introductory bonus tend to charge the highest annual fees, like the Chase Sapphire Reserve card with its $450 annual fee, for example. However, keep in mind that a low- or no-annual-fee card doesn’t always mean the most value.
Some of the best no annual-fee cards to consider include the Discover it and Fidelity® Rewards Visa Signature® Card, which both offer great rewards without annual fees.
If you keep the card for a long time, the annual fee makes a great difference. For example, over a 10-year span, the Fidelity® Rewards Visa Signature® Card will outperform Barclaycard Arrival Plus™ World Elite MasterCard® ($4,180 in total rewards for ten years less the annual fee vs. $3,779).
When it comes to choosing the right credit card and getting the most value from your spending, there is no recipe that is perfect for every card user. You should understand your spending pattern, budget and plans for the future to make the best choice.
If you will easily qualify for an introductory bonus by spending a decent sum of money in the first three months of opening your card account, and will make use of extra travel benefits, the Barclaycard Arrival Plus™ World Elite MasterCard® or Chase Sapphire Reserve are offering the biggest rewards and may be your best options.
All things equal, the Chase Sapphire Reserve card is the clear winner in our 3-year calculation. However, after they drop the introductory bonus, it is almost even with the Barclaycard Arrival Plus™ World Elite MasterCard®, with the Capital One Venture Miles Rewards card coming in third.
If you are looking at the long-term value and want a credit card that you can hold onto for around ten years, consider a flat-rate no annual fee cards like Fidelity® Rewards Visa Signature®.
If your spending varies greatly from the average consumer and the majority of your spending falls into a single category (like dining out or groceries), you might find that a 5% cashback card will outperform other cards.
Further, most of the cards that are mentioned here are available for good or excellent credit scores. If your credit is not there yet, it may be best for you to focus on building your credit score with a secured credit card until you qualify for an unsecured card. As you make your payments on time and manage your account responsibly, you will build better credit.
It is worth noting that no rewards will justify paying interest on your card balance, so if you tend to carry a balance from month to month, forego rewards programs and instead consider a low-APR card, with a low or no annual fee — it will save you much more money in the long run.
Calculations by CardsMix.com rewards calculator
Our guest blogger, Alex Gerard is founder and editor of Cardsmix.com.
A personal finance and banking expert, he draws upon 10+ years of experience in banking consultancy, financial analysis and IT.
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