Good morning everyone, I hope you all had a great New Years celebration, but now it’s Monday morning and time to get back to reality.  A few months ago, my friends Daniel, Esther and Michael started a blog: DEMflyers.com.  (The ‘D’ is Daniel, the ‘E’ is Esther, the ‘M’ is Michael, and the ‘flyers’ is who they are.)  They are very experienced travel hackers and members of the SF Travel Hackers Meetup Group.  Like I always say, 3 travel hackers/bloggers is better than me 1, so I always look forward to reading their informative, educational, and entertaining posts (except for writing 94 letters to IHG, no one has time for that!)

Anyway, a few days ago, I asked the DEMflyers team if they could help me with a math problem.  How many Citi Thank You Points per year do I need to redeem to justify paying the $450 Citi Prestige annual fee vs. paying the $95 Citi Premier annual fee?  Take it away Daniel…

The number one rule of churning is that you should never pay an annual fee.  Go for a retention offer, downgrade, or cancel, but never pay an annual fee.

This is the conventional wisdom for two reasons: First, the fees add up.  If you keep just 10 rewards credit cards a year but pay a $95 annual fee on each one, you’re paying nearly $1,000 in annual fees for benefits you probably don’t even use.  Second, the value proposition is usually in the sign-up bonus, so you have no reason to keep the card after you’ve received the bonus. 

I’m a math guy.  I’ve written about why the Starwood ‘Open the World’ promo was a waste of your time, why it actually might make sense to hand write 94 postcards, and why points and cash isn’t always as good a deal as it seems.  Whatever the flavor of the week, I try to let math dictate what I churn, whether I manufacture spend, or if I jump on a particular deal.  So, like everyone else, I dutifully downgrade or cancel my cards, because that’s what the math tells me to do.

That said, there are benefits for which I would be willing to pay an annual fee, primary among them is when a credit card offers the ability to transfer points to airline partners or redeem them at an increased rate.

For Citi, the two cards that satisfy these requirements are the Prestige and Premier.  The former carries a whopping $450 annual fee, and the latter a more palatable $95 annual fee.  Would anyone in their right mind pay for the Citi Prestige?

The Citi Prestige offers a $250 annual airline credit (which can be used for both tickets and fees), lounge access, the fourth night free on hotel stays, three free rounds of golf, and a host of other premium benefits above and beyond allowing you to transfer your Citi Thank You Points (TYP) to partners.  It also allows you to purchase cash airline tickets with TYP for a rate of 1.6 cents per point (CPP) for redemptions on American Airlines (AA) and 1.33 CPP for all other airlines.  The Citi Premier, on the other hand, does not offer any of those premium benefits but does allow you to transfer TYP to partners and purchase airfare (both from American Airlines and other airlines) for 1.25 CPP.

Let’s conservatively value the airline credit at 80% of face value, since you can always buy an AA gift card for $250 and resell it for $200.  Right off the bat, we’ve reduced the annual fee to $250 ($450 – $200).

Then assume you don’t play golf, never stay for more than three nights at a hotel, and don’t really care about lounge access (I would actually argue this is most people).  How many TYP would you need to redeem for the Citi Prestige to be worth keeping instead of the Citi Premier?

If you’re only transferring TYP to airline and hotel partners, then no number of points will make the Citi Prestige more valuable than the Citi Premier, because the TYP have the same value in both cases.  If you’re purchasing airfare through Citi’s travel portal, however, we can look at two cases:

1. You always fly American Airlines (and therefore always get the best redemption rates with the Citi Prestige).
2. You never fly American Airlines.

In the first case, you get an extra 0.35 CPP redeemed on America Airlines flights (1.60 – 1.25 CPP), so you are better off ponying up the $450 annual fee if you redeem enough points to make up the $155 differential ($250 – $95). That number is:

$155 / 0.0035 = 44,285 Citi Thank You Points

In the second case, you get an extra 0.08 CPP redeemed for all other airlines (1.33 – 1.25 CPP), so your breakeven point is:

$155 / 0.0008 = 193,750 Citi Thank You Points

If you fly a mix of airlines, then your breakeven point will fall somewhere between the two values, but in any case it’s a lot of points and more than most people are likely to earn passively in a year.  However, Citigold clients get a $100 discount on the Citi Prestige annual fee, bringing the cutoff to between 15,714 ($55 / 0.0035) and 68,750 ($55 / 0.0008) Citi Thank You Points. That’s much more reasonable and would certainly be enough for me to keep the Citi Prestige.  If you value the lounge access or other benefits provided by the Citi Prestige (e.g. I value the lounge access at the cost of the food I would have otherwise had to pay for at the airport), the number goes down even further.

I’m not saying that you *should* keep either card, but if you’re planning on keeping one, hopefully I can help you decide which card will give you most bang for your buck.  Because that’s what it’s all about, isn’t it?  Happy hacking!

A big thank you to Daniel for writing this guest post. If you have any questions or comments, please leave a comment below. Have a great day everyone!

P.S. If you liked this guest post, please follow them on Twitter @ DEMFlyers and check out these other DEMflyers posts:

+ A Theoretical Travel Hacker Walks Into a Bar
+ A Costly Redemption Mistake and its Repercussions
+ Chase Reconsideration via Secure Message Does Work!