Smart Financial Decisions: Chase Freedom Credit Card
As I have become more involved in the FIRE community over the past several months, it’s been hard to avoid articles about optimizing one’s use of credit cards.
Initially, I was skeptical. It seemed like the primary focus was travel hacking, which didn’t do a lot for me.
I am not a big traveler.
I am a middle-aged man, with a full-time job, a long commute, a wife, a dog, and two young children.
But as I learned more about credit cards, taking steps to proactively optimize our cash back rewards began to interest me more and more.
For a long time we have used a Fidelity Rewards Visa Signature card, which offers 2% cash back on all purchases. The card’s simplicity is incredibly attractive to us – no need to think too much, just buy what we need, and get 2% back on everything.
As I explored dozens of articles and lists about top credit cards, and thought about signing up for a new card, a few key factors stood out given our financial situation.
We pay off our credit cards every month, so low balance transfer teaser rates don’t impact our decision making, and we paid no attention to how high those rates will be 12, 15, or 18 months down the line. While these would be critical factors for some, all we care about are the annual fee, the sign up incentives, and the potential cash back rewards.
Your results may vary based on your individual financial situation, but based on our needs, a top prospect was the Chase Freedom Credit Card.
No annual fee?
A $150 bonus after spending $500 within the first three months? Plus $25 for adding an additional authorized user?
And 5% cash back?
Although the third check comes with a LARGE asterisk!
The 5% cash back available on the Chase Freedom Credit Card applies only to the first $1,500 in purchases made each quarter in specific spending categories, and each quarter you need to activate the new bonus category online to qualify for 5% cash back. Otherwise, cash back on purchases made with Chase Freedom are only 1%.
So the 5% cash back may apply to just a fraction of your potential spending, and only if you do the proper housekeeping to qualify for the incentive every quarter.
That said, the difference between the 5% offered on at least some of our possible purchases with Chase Freedom, compared to the 2% we have been getting from Fidelity Rewards, was large enough to convince us to give Chase Freedom a try.
In 2017, Chase Freedom offered 5% cash back in the first quarter on up to $1,500 in purchases at gas stations and for local commuter transportation. We spent about $700 on gasoline during the first quarter, so there’s some potential value there. Using Chase Freedom instead of Fidelity Rewards for all of our spending at gas stations between January and March would have given us an extra $21 in cash back.
The second quarter incentive is 5% cash back on up to $1,500 in purchases at select grocery stores (Wal-Mart and Target are specifically excluded) and drug stores. This one is a slam dunk for our family, and why we signed up for Chase Freedom last month. We will spend well over $1,500 on groceries between April and June, so using Chase Freedom instead of Fidelity Rewards for this spending will provide an additional $45 in cash rewards. We will need to remember to switch back to the Fidelity card after we have spent $1,500 on groceries with Chase Freedom this quarter, because once we have maxed out our 5% cash back with Chase, the 2% cash back from Fidelity will be more attractive than the 1% standard cash back from Chase Freedom.
The potential benefits of Chase Freedom to our family over the remainder of 2017 are less certain. When the third quarter begins in July, up to $1,500 in purchases on “Summer Fun” will be eligible for 5% cash back, with similar incentives available on “Holiday” spending in the fourth quarter.
How Chase ultimately defines those categories and the eligible retailers will go a long way towards determining how much value we can extract by using the Chase card instead of our Fidelity card during the second half of the year. Last year it appears Restaurant and Wholesale Club spending qualified as “Summer Fun” during the third quarter, and spending at Department Stores, Drugstores, and Wholesale Clubs qualified for 5% cash back during the fourth quarter. We don’t dine out that often, so restaurants will not have a huge impact on our rewards, unless we dramatically change our spending patterns. We do frequent Costco, so a quarter or two of enhanced cash back at wholesale clubs could have a big impact for us.
My guesstimate is we’ll be able to charge at least $1,200 in purchases eligible for 5% cash back on Chase Freedom during the second half of the year, which will give us an extra $36 compared to Fidelity Rewards.
So for the year, using Chase Freedom instead of Fidelity Rewards for targeted purchases should provide us with a little more than $100 extra cash back ($21 in Q1, $45 in Q2, and $36 in Q3/Q4 combined).
Importantly, though, we haven’t factored in the sign up incentives yet.
Since we spent more than $500 on groceries with Chase Freedom already, we have been credited with our $150 bonus. We also ordered a second card for Mrs. ROMT as an authorized user, which qualified us for an additional $25 when she went shopping.
So we are now closing in on $300 in potential value by adding Chase Freedom this year. A nice little step on the path to financial independence!
As I mentioned, there are some hoops to jump through to extract that value. You need to activate the 5% cash back offers each quarter, and, in our case, track our spending so that if we reach the $1,500 quarterly purchase limit, we switch additional purchases back to Fidelity Rewards. There is also the additional complication of regularly changing which credit card we use for specific purchases. In the first quarter, it would have been Chase Freedom at the gas station, and Fidelity Rewards for everything else. Right now, it’s Chase Freedom for groceries, and Fidelity Rewards for everything else, including gasoline. Once we hit $1,500 in grocery spending on Chase Freedom for the second quarter, it will temporarily be Fidelity Rewards for everything. In July things will change again, based on the 5% cash back bonus categories for Chase Freedom for the third quarter.
I understand this type of switching is not for everyone. Mrs. ROMT was somewhat skeptical when I mentioned my plan to use multiple credit cards. Fortunately, she is a good sport, and gave it a try!
When we received our first bill from Chase Freedom for over $600 in groceries, we also saw over $200 in cash back rewards we could apply directly to that bill ($150 bonus, plus $25 additional user, plus over $30 in cash back from the purchases). After that, Mrs. ROMT was sold!
Going forward, the benefits will be smaller. As I mentioned earlier, I think we can get over $100 a year in extra cash back by using Chase Freedom instead of Fidelity Rewards on purchases we already make.
The maximum annual benefit to us by using Chase Freedom rather than Fidelity Rewards would be $180, representing the extra 3% we could earn on $6,000 in purchases in the bonus categories (up to $1,500 per quarter).
It’s unlikely we’ll reach that level unless we change our spending habits, which is a potential risk in using cards like this. If we normally spend a few hundred dollars a quarter on restaurants, but then start dining out on a weekly basis to max out potential cash back rewards, yes, we’ll be getting more cash back, but we’ll also be spending over a thousand extra dollars to earn those rewards. That’s what we need to be careful about as we pursue early retirement!
The Pros of Chase Freedom for the ROMT Family:
1. About $300 in bonuses and extra cash back the first year by using Chase Freedom strategically for purchases we already make.
2. $100 to $150 in potential extra cash back in subsequent years, dependent upon the bonus categories and retailers identified every quarter by Chase. The maximum extra cash back we can earn in future years relative to Fidelity Rewards is $180.
The Potential Cons of Chase Freedom for the ROMT Family:
1. The requirement to activate the 5% bonus categories online every quarter. The process is simple, but if we forget, we’ll only get 1% cash back.
2. The need to change which credit card we use for specific purchases every quarter, since we now have multiple credit cards with different cash back reward levels and spending categories, some of which are constantly changing!
3. The potential to increase spending unnecessarily to maximize cash back from bonus categories.
Overall, I think using the Chase Freedom card as a complement to our Fidelity Rewards card was a good decision for our family. It has already provided over $200 in benefits, and should provide over $100 in benefits each year in the future. Managing the bonus categories online and keeping track of which card we should use at which retailer is not a big enough hurdle for us to disregard those potential benefits.