Last night I posted about Chase officially confirming the details of the new Sapphire Reserve Card, which looks like it might be one of the most compelling credit cards we’ve ever seen. The card will offer triple points on dining and travel, meaning it’s 50% more rewarding in travel than the Chase Sapphire Preferred® Card.
Reader Mike asked the following question in regards to the card:
Lucky, one thing I don’t understand is why the card has a $450 annual fee and $300 travel credit, which seems good as cash. Would they not get more people to sign up if they just made the annual fee $150? Since registration is not required to use the travel credit, I assume most cardmembers will use the credit.
It’s an interesting question, as American Express and Citi have similar airline credits on some of their cards.
Premium credit card “credits” keep getting better
It’s sort of interesting how the credits offered with premium credit cards keep getting better:
- One of the first major cards with such a credit was The Platinum Card® from American Express, which offers a $200 annual airline fee credit. However, you have to nominate a specific airline for this benefit, and it’s only technically valid on fees, and not on airfare itself
- Then the Citi Prestige® Card introduced a $250 annual travel credit. This doesn’t require registration, and any purchase coded as travel should qualify.
- Now Chase is outdoing both American Express and Citi, both in terms of the amount and usefulness of the credit. They’ll be offering a $300 annual travel credit on the Chase Sapphire Reserve®. This will be valid on anything coded as a travel purchase, and registration won’t be required
Presumably there are many cardmembers who don’t use the Amex Platinum Card’s $200 airline fee credit, though I imagine a vast majority of cardmembers use the benefit on the Citi Prestige Card. There should be even more people using the benefit on the Sapphire Reserve Card, since all travel is covered.
So, why the big credits and $450 annual fees?
I don’t think breakage in the credit is the credit card companies are charging $450+ annual fees with big credits. Contrary to popular belief, I also don’t think Chase and Citi offer such big credits because they necessarily want you to put your travel purchases on those cards. The Citi Prestige Card offers triple points on airfare and hotels, while the Chase Sapphire Reserve Card offers 3x points on travel.
Merchant fees for Mastercard and Visa are typically under 2%, so the rewards they’re issuing on those are greater than the fees they’re typically generating.
So, what’s the motivation? I suspect two factors, both of which are ultimately psychological:
Issuers don’t want to dilute their own card portfolio
The credit card companies want to be sure their card portfolio is differentiated enough so that they’re not diluting their existing products when adding new ones. For example, if the Chase Sapphire Preferred® Card had a $95 annual fee and Chase Sapphire Reserve Card had a $150 annual fee, it would likely create confusion among potential cardmembers. They’d also be going after very similar customer bases.
To give an example, American Express has two great mid-range cards for maximizing your points, including the Amex EveryDay® Preferred Credit Card ($95 annual fee) and the American Express® Gold Card ($250 annual fee (Rates & Fees)). The latter comes with a $100 annual airline fee credit (This benefit ends on December 31, 2021), meaning the “out of pocket” is only marginally different, but they’ve created the sense that they’re very different because of the different annual fees.
Issuers design the mid-range ~$95 annual fee credit cards for the average consumer, while they’re going after higher income consumers with the ~$450 annual fee cards.
Issuers are going after high income individuals with premium cards
This is largely psychological, because a $450-550 annual fee card could make a lot of sense for someone who isn’t a high roller, especially with a $300 travel credit. However, by having a higher annual fee they’re inherently going after higher income consumers.
Many people are willing to pay a premium for something they perceive to be rare, and that’s how many people feel about high annual fee cards. Many people still think there’s some prestige associated with having an Amex Platinum Card, for example.
So by having a $450-550 annual fee, these premiums are going after higher end consumers who don’t mind paying for a card they may perceive to be prestigious or rare, regardless of whether or not that’s actually the case. They want these consumers since they’re also the people who will be spending the most on their credit cards.
At the same time, by having the airline credit they’re opening themselves up to people who are still looking for value.
Why do you think we’re seeing a trend where premium cards are offering progressively bigger annual credits?
The following links will direct you to the rates and fees for mentioned American Express Cards. These include: American Express® Gold Card (Rates & Fees).