There has been much debate about prepaid cards and opportunity costs. I’ve studied this topic in school and on my CPA exam, but I’ll admit I’m not expert on this topic, I can only share my opinion.
In Frequent Miler’s post yesterday, he states that the opportunity cost of using an AMEX SPG card to buy a Vanilla Reload card is 2 cents per mile. I think his article was quite confusing, but I’ll try to explain what he meant.
Let’s check out the definition from Wikipedia:
Opportunity cost is defined by a choice is the value of the best alternative forgone, in a situation in which a choice needs to be made between several mutually exclusive alternatives given limited resources.
This definition is too confusing, let’s try another:
Opportunity cost is what you have to forgo when you choose to do A rather than B. For example, the opportunity cost of Mr X donating blood is that he can’t attend his class on economics. In the healthcare sense, every dollar spent on research into breast cancer is a dollar less on research into type 1 diabetes.
Let’s assume option A is buying a prepaid Vanilla Reload card with AMEX SPG at 504 SPG points per $3.95.
Option B = Using a 2% cashback card to earn $10.08 per $3.95
Frequent Miler is saying that choosing option A would have an opportunity cost of $6, the amount you would forgo.
Choosing option B would forgo opportunity to buy 504 SPG points at $3.95. If you value SPG points at 2 cents per point, then you would be $6 ahead.
If you choose option A, you are saying that AMEX SPG is greater than 2% cash back because you would rather forgo the cash back.
If you choose option B, you are saying the 2% cash back is more valuable because you would rather forgo the opportunity to buy 504 SPG points at $3.95.
It all depends how much an SPG point is worth to you. If you think it is worth more than 2% cash back, then you should use an AMEX SPG card. I value an SPG point conservatively at 2.2 cents per point, so it makes sense to use an AMEX SPG card or a Barclaycard Arrival (also 2.2% back).
Comparing Other Credit Card Options
Let’s apply this definition to three different credit card options. For example, let’s use Barclaycard Arrival as “A”, AMEX SPG as “B”, and Chase Sapphire as “C”.
If I use “A”, my opportunity cost of forgoing B would be 1,108 Barclaycard points (at 2x + 10% rebate = $504*2.2 = 1,108) minus $3.95 or $7.13.
If I use “B” my opportunity cost of forgoing A would be 504 SPG points (at 2.2 cents each) minus $3.95 = $7.13
If I use my Chase Sapphire card, I would earn 504 points at 1.5 cents each minus $3.95 = $3.61. The opportunity cost of forgoing option A/B would be 504 SPG or 1,108 Barclay points. This option has a higher opportunity cost than option A or B because 504 SPG or 1,108 Barclay points are more valuable than 504 UR points.
Therefore, I would equate the opportunity costs between using Barclaycard Arrival and AMEX SPG the same. The opportunity cost for Chase Sapphire Preferred is higher because you are forgoing the better option.
Opportunity costs when compared to non points related activity.
The other way to compare opportunity costs is hard to quantify. You would have to compare the opportunity costs between buying a Vanilla Reload to not buying a Vanilla Reload. Would you rather spend $3.95 to earn 504 SPG points or would you rather stay at home, save the money, and do nothing?
I’ve recently decided to stop buying Chase gift cards unless it’s for minimum spend because Walmart is far from me and quite frustrating with the broken machines and interesting workers. The opportunity costs of quitting is free points at Chase, while the opportunity costs of buying Chase gift cards is calling to activate the cards, the hassle of driving to Walmart, gas money, waiting in line, transferring via Bluebird, etc.
I think most of us here would buy Vanilla Reloads to earn more points to travel for a huge discount rather than do nothing. However, collecting points and miles is not free. It takes time and effort to collect points and miles. Also, driving around to Walmart and CVS is another cost. Writing this blog has opportunity costs. All of these activities and organizing our credit cards and points and miles is our “opportunity cost”. Sometimes is hard to quantify the two options. I would say that credit card churning has low opportunity costs because you aren’t giving up too much time and leisure to earn points. However, manufactured spending like Vanilla Reloads, Target Prepaid, Chase gift cards, etc. can have a bigger opportunity cost. That opportunity cost is that you could spend your time doing other things. It’s important to take a step back and ask yourself “Is it worth it?”
Did this post about prepaid cards and opportunity costs confuse you even more or was it helpful?
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