Thursday, 5 May 2011

Always use American Express (except when the service fee is 1% or greater)

by Rob d'Apice
As a general rule, American Express cards earn more reward points than Mastercard or Visa.  Why?  American Express charges higher fees to merchants/retailers when you use the cards, so therefore they have more money coming in that they can return to you in the form of reward points. For this reason, it's better for you to always spend on an Amex when you can - you'll get more money back.

This advice used to always be true, but the tables turned on American Express in 2003, when the RBA introduced reforms aimed at reducing Merchant Service Fees (also called the credit card 'interchange fee'). One component of these reforms was the abolition of the 'No Surcharge' rule: merchants could now enforce a surcharge for using a credit card, and the surcharge could be different depending on the card.

In practice, I've found roughly half of the merchants I buy from don't charge a Service fee on any card. In these cases, always use your Amex. For the remainder, you should always use your Amex EXCEPT where the Amex surcharge is (roughly) 1% higher than the Mastercard/Visa alternative. The reason behind this is that Amex (roughly) returns 1.5% of the transaction total in reward points, whereas a visa or mastercard generally only returns 0.5% - the difference between the two being roughly 1%.  This obviously depends a lot on the cards in question, but is generally a good rule of thumb.

You may be thinking: "You want me to get a Visa AND an Amex?? You are downright loco!" Well, almost all the banks now offer credit card accounts where you get both an Amex and Visa/Mastercard linked to exactly the same account (only one credit limit, annual fee, etc.), so don't go around calling people loco so quickly, eh hombre?


  1. Dear Dapblog,

    I have a question about using a credit card at all when there is a service fee.

    The issue I'm not seeing entirely is...

    You outlined in commandment 1 that the only above parity way to redeem the value of your points is through a flight (is this correct?). Given that you have to pay extra cash to use the card when a surcharge is required, is there a purchase size to surcharge ratio that becomes important here? Or is it always in our favour?

    Or am I on the wrong track entirely?

  2. This is a good point which I conveniently ignore (and will get to in a later post). In a lot of cases, when there is a surcharge, I would elect not to use a credit card at all (unless I want to take advantage of free extended warranties, free travel insurance, etc. that comes with my card).

    The BEST simple test is: does this transaction earn more $ (via points) than the $ surcharge? I have a simple rule for dealing with this, and it's different for each card:

    - With an Amex, you generally get 1.5 Qantas FF points per $ (or some other equivalent points). This is about 1.5 cents (given the conversion ratios you saw in Commandment 1, which is roughly 1 QFF = 1 cent). That means you get about 1.5% of the transaction returned to you in reward points. If the surcharge is greater than 1.5%, then it's not worth using the card

    - Similarly with a Visa, you generally get 0.5 QFFs, or ~0.5 cents. Therefore if the surcharge is greater than 0.5%, then it's not worth using the card.

    In this post, I was trying to simply compare an Amex and a Visa, but I didn't cover the other case: when you shouldn't use a card at all. You're right, this is important, and I'll cover it in a later post (some pretty pictures may help).

    Does this answer your question?

  3. Yes, it does.

    I presume then you also have to think about whether or not you are going to use the points for flights or not (and I suppose including that you have to use Qantas FF points on Qantas affiliated airlines, which may not be the most cost effective way to get to your destination).

    This is becoming very complicated...Ahhhhhhhh

  4. Yes - what you intend to use your points for DOES matter in working out what the breakeven is between surcharge and point-earn rate.

    BUT, approximating is fine. Give or take a few 0.1% and I think the 0.5% and 1.5% rules are a good rule of thumb. When in doubt, don't use your credit card.

    In any case, dapcards is coming and will solve these problems automatically for you!

  5. This is all truely excellent food for thought. Thanks!