Wednesday, December 3, 2014

Credit Card Moneyball

Just before Thanksgiving, my parents found out that their favorite credit card had just passed away.

We had been using this to generate a lot of psuedo-spend while we "earned" almost $2,500 in cash back rewards (and had another $1,000 pending when the music stopped).

While their team of 30+ reward credit cards definitely lost their MVP last week, my father is nothing if not a resilient, analytical problem solver.

This situation really reminded me of the story (book not movie) of Moneyball where the 2002 Oakland A's had lost 3 of their best players, including the reigning American League Most Valuable Player, Jason Giambi. Or so I've heard, given I wasn't born until 2011.

When confronted with losing their MVP, they worried that they would be unable to replace his individual production. However, the clever General Manager Billy Beane understood that it wasn't a question about replacing an individual's contribution, but rather, how do you maintain the value of the collective team. So instead of finding a single replacement, he went for a multi-pronged solution of several players that would together allow the team to continue.

And thus, my father went through his strategic planning mode. He took a single unit transaction to analyze the lost return potential now that his Old Amex Blue was cancelled. Let's just assume he had a $500 purchase he needed to make (say my daycare expense). What would be the best way to make that purchase?

  • Typically, he would purchase a $500 Paypal My Cash reload from Duane Reade with his 5% earning Amex Blue card. 
  • But the My Cash reload card came with an additional fee of $3.95. 
  • So for $503.95, he would earn $25.20 in Reward Dollars, but paid $3.95 in fees, so a net $21.25 of profit per My Cash card. 
  • However, since he would load that card onto his Paypal account (which was linked to a 1% earning Paypal Debit card), he would get back $5.00, bringing his total profit back to $26.25 (or 5.2% cash back).
Now that he lost his MVP, he had to find a way to get as close to a 5.2% return as possible for that $500 spend. So he looked at the reserves sitting on the bench.

1. American Express Starwood - earned 1 SPG point per $1 spent (valued at 2.5 cents/pt)
2. Citi Double Cash - earned 1% cash back on purchase and another 1% when paid off
3. Barclays Arrival+ - earned 2.2% worth of statement credits for travel related spend

Clearly, using either of these cards seems woefully inadequate compared to the Old Amex Blue. Depending on your own valuation of a SPG point, the best card would seem to be Starwood (2.7% return your $503.95 spend) but still only half of what we were earning with the Old Amex Blue.

However, when we start to look at adding a few iterations, the math started to look better. In this scenario, instead of the 2 step process of (a) using the Starwood Amex to buy a Paypal reload, then (b) using the Paypal Debit to make the $500 purchase, we would add and change a few steps.

1. Purchase the Paypal Reload (seen  below as MS for Manufactured Spend)
2. Find another way to withdraw the $500 from the Paypal account to your bank account.
3. Use the Starwood Amex again to directly make the originally intended $500 purchase.
4. Use the $500 cash in your bank account from Step #2 to pay off the Starwood Amex.

So by doing it this way, we see that the Starwood Amex can in fact generate 4.2% of net rewards (and possibly even more if you value a SPG point more than 2.5 cents/pt).

Of course, this scheme only really works well for a single $500 purchase and would be much more difficult to scale up to $8,000-10,000 each month - especially since Paypal is notorious for surprise shutdowns for people adding / withdrawing cash quickly instead of using their payment system as intended.

Well, looks like my father failed, but then again, I don't recall the Oakland A's winning the World Series lately either. Back to the drawing board for both of us, Billy Beane.

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