American Express Blue Cash Preferred card (2)
Published:
In this post in March, I discussed the reward structure of the American Express Blue Cash Preferred card. Here is a quick review. The annual fee is $95. The cash back structure is as follows.
- 6% cash back at U.S. supermarkets on up to $6,000 per year, then 1%
- 6% cash back on select U.S. streaming subscriptions
- 3% cash back on gas at U.S. gas stations
- 3% cash back on transit (e.g., taxis, rideshare, parking, tolls, trains, buses)
- 1% cash back on other purchases
As stated before, I use this card only for supermarkets and transit, as other categories are either irrelevant or dominated by other cards.
Now, it occurred to me to wonder how American Express makes money if people optimize credit card usage (like me). The profit margin on groceries can’t be too large, so merchants operating grocery stores can’t be paying 6% to American Express. Most likely, it’s around 2-3%, which means that American Express incurs a loss of around 3-4% whenever I use this card. Assuming the loss to American Express is 3.5%, as long as the cardholder doesn’t spend more than \(95/0.035=2,714\) dollars on groceries per year, the loss can be covered by the annual fee. I just checked my account, and this year I have already received 278.84 Reward Dollars from grocery shopping alone, which implies I have spent $4,647. Since 4,647 lies between 2,714 and 6,000, I am a bad customer for American Express (which may explain why they disabled my referral link).
Here is another consideration. My opportunity cost of using a credit card is 2% because the Fidelity Rewards Visa Signature card has no annual fee and offers unlimited 2% cash back on all purchases. So, letting \(x\) be the break-even spending amount on groceries with the American Express Blue Cash Preferred card, we have \[\frac{6}{100}x-95=\frac{2}{100}x\iff x=2375,\] so getting the American Express Blue Cash Preferred card makes sense only if one expects to spend at least $2,375 in groceries per year (ignoring other benefits). I expect to spend at least this amount in the foreseeable future, but it is worth remembering that the card may not be worth keeping at some point.