Consumer Ed: which Southwest credit card is better?

My friend flies Southwest Airlines a lot, and he recently decided it would be worth it to get one of its frequent flyer credit cards.

My friend was careful to consider the options, as each Southwest Rapid Rewards credit card carries an annual fee.

There were two different cards that he was deciding between: the Southwest Rapid Rewards Plus card and the Southwest Rapid Rewards Premier card.

Both cards offer a great opening bonus of 50,000 points (worth more than $800 in free flights). And they have pretty much the same terms, except for two attributes.

The only distinguishing points were (1) annual fees and an (2) annual reward bonus levels of points.

Here are the distinguishing features:

Southwest Plus card: $69 annual fee, bonus of 3,000 points yearly
Southwest Premier:    $99 annual fee, bonus of 6,000 points yearly

The question I was asked, and that I will ask you, is which card is a better deal?

The extra details you need to know are this: fares can be redeemed at the rate of 60 points per $1 of fare price, and the annual fee is charged immediately on the first statement.

So what’s the right choice: do you get the card with the higher annual fee and higher yearly bonus, or do you go for the lower annual fee?

How to analyze the problem

This is a relatively simple math problem, but it is worth doing carefully as a lesson in consumer education.

The Southwest Premier card has a higher annual fee by $30, but it also provides an extra 3,000 of rewards points every year.

The first step is to convert those reward points into dollars. This allows us to compare the dollar annual costs with the dollar benefits in rewards.

As of this writing, Southwest states that 60 points equate to $1 in airfare rewards. Thus we have:

3000 points x ($1 reward / 60 points) = $50 reward

So now we see the Southwest Premier card offers quite a bit of extra rewards every year.

The second step is to compare costs and benefits of each card

The Premier card has an annual fee that is $30 higher than the Plus. But as we just calculated, the Premier card also gives $50 extra in reward points every year.

When you first get the Premier card, it will cost you $30 more for its annual fee on its first statement. Then, one year forward, the Premier card will still cost $30 extra, but it will provide $50 in rewards. Thus the Premier offers a net reward that is $20 higher from year 1 and onwards.

As you can reason, the Premier card is an extra $30 investment up front, but it provides $20 extra every year. From year 2 and onwards, the Premier card will win out:

–On the first statement, the Premier card is costlier by $30
–In 1 year’s time, the Premier card is costlier by $10
–In 2 year’s time, the Premier card is ahead by $10 in rewards
–In 3 year’s time, the Premier card is ahead by $30 in rewards
–Every further year, the Premier card gets ahead by another $20 in rewards

Therefore, the answer of which card is better depends on how long you expect to keep the card.

Someone who chases the opening bonuses (both cards offers $800+ of free flights) might be inclined to get the Plus card.

But a longer-term customer of Southwest can do better by getting the Premier card.

If you applied for the Plus and wanted the Premier card, you might not have to worry.

There is a chance you can call up Chase and ask them to change the loyalty terms. I would think that if you ask to go from a $69 annual fee card to a $99 annual fee card, Chase would be happy to oblige (but I can’t say for sure).

You can use this tip for other credit cards too. As explained on CreditCards.com,

While you probably won’t be able to make changes to your current rewards structure, you may be able to transition to a different rewards package offered by your card company. You even may be able to keep the same card and account history after the transition.

Even though the math says the Premier can be better, one should be practical about the limitations of the calculation. We should remember that loyalty programs and airline mileage terms are notorious for changing conditions and terms. Those reward points today may not be worth as much a few years from now, and you might end up cancelling the card at some point.

So you might be better off taking the Plus with its $69 annual fee and re-evaluating after a couple of years.