FinanceBuzz Credit Card Rewards Valuation Model

Last updated Mar 4, 2020 | By FinanceBuzz Editors

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Reward credit cards can provide huge value, but pinpointing exactly how much value can be a challenge. That's where we, the FinanceBuzz editors, come in. We've created a valuation formula to help you compare rewards across cards.

It's important to keep in mind that these are estimated values - your actual earnings will depend on how much you spend and in what categories.

How we calculate the values

Based on Census data and our internal polling, we've established average spend in categories where you're likely to spend significant money every year on your credit cards. Again, these are average values used for illustrative purposes. If your spending varies greatly from these estimates, you may want to create your calculation.

Category Estimated annual household spend
Groceries $11,700
Dining out $3,600
Gas $2,400
Entertainment $3,600
Travel $5,000
Other $7,200

We plug these annual spend numbers into a formula that takes into account the reward rates for each spend category for the card. For travel rewards cards, we assign a value to each point or mile based on industry guidance.

To calculate a card's year-one value, we include the sign-up bonus value when there is one. For both year one and year two, we also subtract the annual fee when there is one.

Example calculation using the Chase Sapphire Reserve

We start with the FinanceBuzz category spending amounts and our bonus multipliers to get the annual points earned in each category. The Chase Sapphire Reserve offers 3X points on dining and travel spend so we take the spend in those categories and multiply it by three. You earn one point per dollar in the other categories so those are simply multiplied by one.

Category Annual household spend Multiplier Annual points
Groceries $11,700 1x 11,700
Dining out $3,600 3x 10,800
Gas $2,400 1x 2,400
Entertainment $3,600 1x 3,600
Travel $5,000 3x 15,000
Other $7,200 1x 7,200

To calculate the year-one value, we take the sum of the points earned from regular spending (50,700) + the sign-up bonus points (50,000).

50,700 + 50,000 = 100,700 points

We then multiply the points total by the value of a point. In the case of the Chase Sapphire Reserve, points can be redeemed for 1.5 cents in the Chase portal so we use that valuation.

100,700 * $.015 = $1,510.50

Finally, we subtract the annual fee from the annual value to get a year one value of $960.50.

$1,510.50 - $550 = $960.50

For year two, we do the same calculation, but don't include the sign-up bonus since you can only earn that in year one, bringing the year two value of $210.50.

Additional value

We're calculating a baseline value for each card based on spend, annual fee, and sign-up bonus. Most rewards cards provide additional value - sometimes thousands of dollars of value - with their other perks. If you're trying to decide if a card is right for you, take a look at these perks and figure out which ones you'll realistically use to get a fuller picture of the card's total value.

Things to consider:

  • Statement credits: Some cards offer credits for travel, airline fees, food delivery, and rideshare fees, among other things. In the example above, the Chase Sapphire Reserve offers a $300 travel credit. If you're sure you'll use that credit, you can add $300 in value to the totals for both year one and year two bringing them to $1260.50 and $510.50 respectively.
  • Travel insurance: Trip delay, trip interruption, baggage, rental car insurance -- they can add up if you use your card to book travel and run into any issues.
  • Airport lounge access: If you travel just a few times a year, lounge access can make travel more enjoyable, plus you get to avoid paying the outrageous airport prices for food and drink, leaving more money in your wallet.
  • Purchase protection: It's hard to put a value on peace of mind, but even if you don't use this insurance, it can be reassuring to know it's there if your big purchase gets stolen or breaks.
  • Free checked bags: If you travel often, free checked bag fees can add up fast. Many airlines charge $30 each way, making this potentially worth $60 each round-trip flight.
  • Much more! Take time to examine all the card benefits when comparing cards to fully understand how much value each will deliver to you.