If you’re someone in the points and miles community, you’ve heard of earning 3% with the Discover Miles It card. But if you go to Discover.com and search for their Discover it Miles “3%” card, you’ll come up empty. And a reason you won’t find a “3%” card leads to the topic I want to explore. In what way is this a 3% card?
First a quick overview of the card. When you go to Discover.com, you’ll “discover” that the Discover it Miles Card earns 1.5% cashback on all spending (they call it miles). So how does a card that earns 1.5% turn into a 3% card? Here’s where the magic happens. As a sign up “bonus” (they use the word “bonus”) Discover will match the cashback you earned during your first 12 statement cycles.
The 3% is therefore made up two components.
- The ongoing earning rate of 1.5% which is paid out on a monthly basis
- A one-time, lump sum “bonus” at the end of the twelfth statement cycle
But notice something, in referring to the Discover it Miles Card as a “3%” card, we’ve decided to assign an earn rate based on the total first year return of a card. An earn rate which includes the sum of:
The ongoing earn rate of the card + The value of the one-time, lump sum bonus.
Why is this important? As soon as we designate the earn rate of a card in light of its total first year return, it may change how we evaluate comparative cards.
The main point I hope to make is this…
The first-year value of the Discover it Miles Card needs to be evaluated in terms of how the 3% is delivered: As a combination of both the ongoing earn rate, plus the value of the one-time, lump sum, sign-up bonus. As such, it should be compared and contrasted to the total first year value proposition of alternate cards.
To put it another way, the Discover it Miles Card is a solid choice as a first-year 3% card, as long as we keep in mind the following:
- The 3% needs to be comparatively evaluated, in terms of how it’s delivered: As the total first year return of both the sign-up bonus plus the ongoing earn rate.
- The 3% needs to be evaluated in terms of the risk and opportunity cost of when the sign-up bonus is delivered, at the end of 12 months.
Let’s look at each of these.
The 3% needs to be comparatively evaluated in light of the sign bonus
Imagine I’m someone who likes the idea of earn 3%! In fact, I’m taking a serious look at applying for the Discover it Miles Card. In light of the above discussion, I realize that I’m considering a card for which the first-year value (3%) is comprised of two things:
- The ongoing earn rate, and
- A one-time, lump sum bonus
Since that is true, I would want to compare and contrast the Discover it Miles Card with cards that might offer….
- An ongoing earn rate, and
- A one time, lump sum bonus.
Do other cards offer one time, lump sum bonuses? Yes, some of them don’t even make you wait until the end of 12 months to get access to the bonus. Once we recognize that 3% is a combination of both the earn rate and welcome bonus, we need compare it to the total first year return that alternate cards may offer.
For example, what card offers better first year value?
Card #1 – A card that earns a $300 one-time bonus and an ongoing 2% cash back
Card #2 – A card that earns 1.5% for ongoing spend, and a one-time bonus of 1.5% at the end.
It depends. Depends on what? It depends on how much the cardholder will spend in the first year. Will they spend $12,000 a year, or $120,000 a year? The person spending $12,000 will do better with card #1, the person spending $120,000 will do significantly better with card #2.
With $12,000 in spending:
- Card #1 yields a total first year return of $540
- Card #2 yields a total first year return of $360
With $120,000 in spending:
- Card #1 yields a total first year return of $2700
- Card #2 yields a total first year return of $3600
The person who spends $12,000 will do better with card #1, the person spending $120,000 will clearly do better with card #2.
The Break Even Point – The break-even point for Card #1 and Card #2 comes at $30,000 of first year spend. If the cardholder spends less than $30,000 in the first year, card #1 offers a better first year value, if the cardholder spends more than $30,000 the winner is card #2. If someone spends exactly $30,000 in the first 12 months, Card #1 yields a total value of $900, and Card #2 earns $900. It’s a tie!
However, in the case of a tie, the owner of the Discover card has to wait 12 months to receive the full amount. Which brings us to the next consideration: The risk and opportunity cost of waiting for the twelfth-month cashback match.
The 3% needs to be evaluated in terms of the risk and opportunity cost of when the sign-up bonus is delivered, at the end of 12 months.
As a reminder, the total return of 3% is made available as follows:
- 1.5% cash back is earned through the ongoing monthly spend. At the close of each monthly statement, this 1.5% is made available based on the net spend reflected on the monthly statement.
- At the close of the twelfth statement cycle, an additional 1.5% “match” is made based on the cumulative spending for all of the first twelve statement cycles. You also get the monthly 1.5% for your normal month 12, ongoing spend.
Discover puts it this way:
“At the end of your first year, we’ll match all the Miles you’ve earned, automatically. For example, 35,000 Miles turns into 70,000 Miles. That’s $700 towards travel. The more you earn, the more we’ll match”.
The following is additional fine print
I’m guessing most of us would rather see the cashback matched on a month by month basis, but that’s not how it works.
So for months 1-11 it’s a 1.5% card, and then you hit a jackpot after month twelve. For those that use this card in a significant way, it’s not that hard for the match to be a four digit dollar amount. To realize my full 3%, I need to be patient! Is there any downside for waiting 12 months for the payout? I want to point out two factors.
- The risk involved in a delayed payoff
- The opportunity cost of the postponed 1.5% match.
The risk of a delayed payoff.
What is the risk of a delayed payoff to an average consumer? Probably very little. But this card is also touted for those who do manufactured spending. If a cardholder is cycling credit limits and doing 99% of their spending at a place that has “gift card” in the name, over a period of 12 months, there is some risk that something goes sideways. I don’t know what value to assign to that risk factor, but it has to be higher than zero.
Some readers of this article will know the experience of watching the value of their year-end match growing, with the hope that twelfth statement cycle closes and the cash is successfully transferred to their account. In worse-case scenario, the cardholder doesn’t walk away empty-handed, they are earning 1.5% each month.
I want to highlight that reality that as a “3%” card, half the value doesn’t come until the end of the 12 months. It seems some risk should be assigned to this delayed payout.
The opportunity cost of the postponed 1.5% match.
There is also an opportunity cost to not having access to half the value of the card until twelve months later. Upstream we looked at an example of a card which came with a $300 welcome bonus. Let’s assume the terms require me to spend $1000 in ninety days. Let’s also assume that I take the full ninety days to earn the bonus.
This means I get the $300 at the three month point. I have access to $300 nine months earlier than whatever amount I will receive as a match for the Discover card. There is some time value of money that we would factor into the equation.
Not only do I have access to the sign-up bonus. I also have access to the difference in the monthly earn rate. Card #1 earns 2%. The Discover card earns 1.5%. This results in an access to an additional .5% over a 12-month period.
What value should we apply to this opportunity cost? I’m not sure, but it’s higher than zero. The point I want to make is simply this, the 3% needs to be evaluated in terms of the risk and opportunity cost of when the sign-up bonus is delivered, at the end of 12 months. The Discover card is a great way to earn 3%, but we consider that this 3% is delivered, half along the way, and half at the finish line.
Before offering some concluding comments, let’s look at two other thoughts
What about earning an ongoing 3% with “Back to Back” Discover Cards?
The Discover it Miles Card earns “3%” but only for the first year. On the one hand… so what! Can’t a person keep signing up for a new Discover card every twelve months, and in effect, keep earning 3%? Yes, I know people who have enjoyed back to back “first years” with the Discover it Miles Card. But if back to back Discover cards is the path to an ongoing, uncapped 3%, we need to realize what we’re actually doing, we’re stacking the value of back to back welcome bonuses. Are there more profitable welcome bonuses to stack? Maybe, maybe not.
If the Discover Card is a 3% card, what Percentage is the Alternative Card?
If I say that my new Discover card is a 3% card for a set amount of time (12 months), Can I also say that Card #1 (mentioned earlier) is a 30% card for a set amount of time (3 months). The 30% only applies to the first $1000 of spending, but hey, that’s something!
I realize that the 30% example is quite different, it is derived by applying the welcome bonus to a capped amount of $1000, and that $1000 of spend must be completed by a set time or you get $0 of the $300.
On the other hand, the Discover card provides an uncapped and incrementally valuable 3%. Incrementally valuable in that cardholder doesn’t have to meet some minimum spend threshold (like the $1000) to see the welcome bonus (the 1.5% match) applied.
Keeping the Math Consistent
If we take the value of any sign-up bonus, and spread it over a period of time, what does that do to the total rate of return? To find out, we would take the earn rate and multiply it by the numbers of dollars spend in that time frame, and then add in the value of the welcome bonus. This would be true whether the welcome bonus was earned as a one-time lump sum $300, or a one-time lump sum 1.5% match.
We did an example of total value inn the examples of Card #1 and Card #2. I’m encouraging the reader to take a similar look at the total first year return of all cards, based on anticipated spending.
Factoring in Other Variables
I also realize that in comparing cards, there are other factors that may plan into total first year value. I may be considering a card which comes with a $100 travel credit, or a free checked bag, or a $10 a month credit at Shake Shack. All these can play into total first year value. Likewise I may consider a card that earns a $500 sign-up bonus, but comes with a $95 annual fee. I would need to back out the $95 from the total first year value.
The Discover card is touted as a 3% cashback card, and that claim is true. The Discover card has been a valuable part of my points earning arsenal. The point I want to make is that the first-year value of the Discover it Miles Card, needs to be evaluated in terms of how the 3% is delivered: As a combination of both the ongoing earn rate, plus the value of the one-time, lump sum, bonus. As such, it should be compared and contrasted to the total first year value proposition of alternate cards.
- Have you found value in the Discover it Miles Card?
- Have you passed up on a Discover it Miles Card in light of a card for which you found greater value?