Churning & Engagement Rings

Will’s daily recap today contained an interesting article from US Credit Card Guide titled “Hacking the Cost of an Engagement Ring”. While the article contained some good advice, it also encourages a fundamental error that I see frequently, and that I think is worth discussing. (The fundamental error occurs when applied in a general sense, not to Geo’s specific situation.) Buying an engagement ring was what started me on the path to churning, so it’s a topic near and dear to my heart. I’ll dispense some of my own churning-related advice in the second section of this article; feel free to skip one section or the other!

“Hacking the Cost of an Engagement Ring” & Stacking Deals

I recommend you read the full post at US Credit Card Guide, but let’s start by setting up the problem as Geo did. Geo took advantage of the Amex Offer for 20% off at Sam’s Club, with a maximum statement credit of $250 (corresponding to $1,250 in spending), across two cards. $2,529.64 was spent for $2,500 in Vanilla MasterCard Gift Cards (MCGC) and 2,530 Membership Rewards points (MR) were earned. After the two $250 statement credits, the cost was $2,029.64 for $2,500 and 2,030 MR (the two statement credits count against the MR total).

Geo also bought some discounted Jared gift cards at a cost of $2,024 for $2,325, with the $2,024 coming from the MCGC. That equates to a cost of $2,029.64 for $2,325 in Jared gift cards and $476 in MCGC ($2,801 total), as well as 2,030 MR. On the face of it, this represents a significant savings – 27.5% in total ($2,029.64 / $2,801) and 33.2% on the engagement band ([$2,029.64 – $476] / $2,325).

You may immediately recognize a problem, though.

Independent Events

If the only way to spend the MCGC is buying discounted gift cards, the above is a suitable analysis and is spot on. Note that this is the case for Geo, but I want to use this example to illustrate a more general case. In the presence of other liquidation options, though, taking advantage of the Sam’s Club deal and buying discounted Jared gift cards are independent events. Generally, there are other options – Vanilla MCGC can be liquidated to money orders (MOs), assuming your local USPS branches haven’t cracked down on this practice.

With 4 $500 and 2 $250 MCGC, you can buy 2 $998.40 MOs and 1 $498.80 MO. This comes out to spending $2,029.64 for $2,495.60 in cash and 2,030 MR. (MR earned is constant, which is why their value is excluded from the introduction’s calculations.)

Opportunity Cost

If we are considering independent events, then we do not need to use the MCGC to buy discounted Jared gift cards and can instead use any source of money we wish. Naturally, this would be a credit card with rewards. The $2,024 spent on Jared gift cards can be put on a 2% card, or the Chase Freedom Unlimited for 1.5x Ultimate Rewards points (UR).

This would yield $40.48 in cashback or 3,036 UR ($45.54 in cashback if UR are valued at 1.5 cpp).

Tying It Together

Because we are dealing with independent events, we must calculate the percentage savings solely on the amount spent on Jared gift cards versus the amount received in Jared gift cards plus any miscellaneous differences (MO fees, 2% cashback).

Using the MCGC to buy Jared gift cards yields no rewards, and a remaining balance of $476 in MCGC. The cheapest method of liquidation is to buy a $474.80 MO (using it for natural spending would represent an opportunity cost of at least $9.52). The percentage savings is then 12.9% ($2,024 / [$2,325 – $1.20]), the figure quoted at the end of the article.

Using the MCGC to buy MOs and using a credit card with rewards to buy the discounted Jared gift cards has a cost of $4.40 (the MO fees) and a profit of $40.48+ in cashback (from a 2% or better card). In this case, the percentage savings is 14.3%+ ($2,024 / [$2,325 – $4.40 + $40.48]). Liquidating the MCGC to MO instead of Jared gift cards yields an extra savings of at least 1.38%.

More expensive liquidation options, especially those with an opportunity cost of their own, would change this in favor of using the MCGC for discount Jared gift cards, but you still wouldn’t receive a 33% savings because the Sam’s Club savings are independent of the Jared gift cards savings.

It’s easy to get caught up in stacking discrete deals and miss the fact that other liquidation options may be more profitable or may significantly change your percent profit – missing the forest for the trees, so to speak. It’s important to make sure you’re evaluating all your options.

My Advice

Usually, a lot of planning goes in to buying an engagement ring, so they are rarely unexpected expenses. With plenty of time to plan a strategy, my advice is very simple: treat an engagement ring like any other large, planned purchase. What offers the best rate of return on large purchases? Signup bonuses!

As an 0/24 churning newb, I used an engagement ring purchase to hit the minimum spend on the Chase Sapphire Preferred (CSP). By my accounting, I received an equivalent cash savings of 19.1%. (My valuation of UR and purchase amount is left as an exercise to the reader.) There are any number of great signup bonuses that will score you an excellent discount at any level of spending; we’ve compiled an extensive list here. Signup bonuses also hold a distinct advantage compared to discounted gift cards or Amex offers: you aren’t locked in to a restricted set of national vendors. The flexibility to choose your own jeweler is an important benefit, since local jewelers may be able to offer you better value. (Your experience will surely vary, of course!)

You may be thinking that another advantage credit cards have over discounted gift cards are the various forms of purchase protection that credit cards offer. I would argue that that is not the case. In part, this is because jewelry is excluded from both return protection and price protection (for all such benefits of which I am aware). While jewelry is usually eligible for purchase protection (in cases of theft, damage, or involuntary and accidental parting), the limit is often too low to cover the entire amount of an engagement ring – for example, the CSP only covers up to $500 per claim (though the Chase Sapphire Reserve does cover up to $10,000 per claim). Instead of relying on purchase protection, make sure that the ring is covered on your homeowner’s or renter’s insurance from the minute you pick it up. (Be sure to talk to your insurance agent and have all the appropriate riders; insurance policies vary as to whether accidental loss is automatically covered for listed items.)

Of course, there are a host of other things to take into account when buying an engagement ring, and some of them are very important to your choice of signup bonus. Say, for example, your budget! If you don’t set a firm budget beforehand, the gains from the signup bonus will likely impact your budget and lead you to purchase a more expensive ring. But this is no engagement ring buying guide – so for the remainder of the host of other things…you’ll have to head elsewhere!

Questions, comments, etc.? Drop them below.