Damn. I have lamented and tracked what PenFed has been doing to this card for some time now. They just keep making it harder and harder to want to keep this card, but I’m really reluctant to let it go. Yesterday I got a letter stating they were going to start charging an annual fee next month ($25). Now I’m not afraid of annual fees where the spending justifies it, but I only use this card for gas so let’s do a little math and see what the ramifications of this change would be mean to me in terms of my rewards percentage.
In 2012, my family spent $1681.61 on gasoline. 5% of this equates to $84 in rewards. Subtract out the new annual fee and that’s $59. Divide the $59 by your spending in this shows your new rewards percentage. In my case that takes the reward percentage down to 3.5%.
But, wait. It gets worse. On top of the annual fee they reduced the gas rewards rate from 5% to 3% so let’s re-do the math. 3% of $1681.61 is $50.45. Subtract out the annual fee and we’re down to $25.45 or only %1.5!!!
Well, 1.5% is a non-starter because I can just switch that gas spending to my Fidelity Investment Rewards AMEX and get 2% while reducing the cards in my wallet.
So, end of story, right? Just make the switch. Well, the decision is not so clear cut because PenFed gives you a way to avoid the fee AND retain your 5% on gas. Specifically, you must:
- have an active checking account with direct deposit of at least $250/mth.
- have a money market certificate or IRA certificate (credit union equivalent of a CD)
- have a mortgage, installment loan, or equity line with PenFed
- UPDATE according to SCAI reader Mike, he was able to maintain his card simply by opening a $25 money market account – talk to a CSR and certainly try this method first!
There’s no way I’m diverting $250/mth to a PenFed checking account currently yielding a big fat 0%. I would need to transfer that out every month which is a total pain.
There’s also no way I’m refinancing my mortgage or my HELOC over to PenFed either because either would likely require a new appraisal which would cost about $500. That’s nowhere close to worth the time or money involved.
I might buy my next vehicle through PenFed because the rates are solid and their partnership with TrueCar actually seems like I would get a good deal, but I’m certainly not going to be rushed into that kind of decision. Rather I will wait until I have to get out and push my truck home one day because it’s that’s dead
So that leaves me with the money market certificate option. I’m more OK with this because I can simply pull a portion of my emergency fund and dump it in here. But, let’s do the math on the opportunity cost to see if it makes sense.
First, the minimum investment in a money market certificate at PenFed is $1,000. That’s probably what I will put in unless the rates look good so the next step is to take a look at the rates and see what kind of time horizon makes sense. The current rates are:
- 6 Month 0.30% (simple interest only)
- 1-Year 0.50%
- 2-Year 1.00%
- 3-Year 1.26%
- 4-Year 1.41%
- 5-Year 1.56%
- 7-Year 1.76%
These rates are first rate bullshit. You can look back to this post in January where I was lauding PenFed rates. The short term rates especially have dropped incredibly over the past 9 months while the overall interest rate environment during that period has been remarkably stable. That’s a total pisser.
Currently, I earn .75% in the money market account holding my Emergency Fund. That equates to a little more than $7.50/yr if you take compounding into account. If I take the 1 year money market certificate, then I’m giving up about $2.50 in interest. If I take that out of my $84 in rewards, that leaves $81.50 or a rewards yield of 4.85%. Alternatively, I could lock up the money for 2 years and get an extra $2.50 beyond what I’m currently earning annually. This is a tough decision because you all know I’m a fan of liquidity.
Well, then let’s look at the ramifications of an early withdrawal assuming I would have to wipe out my emergency fund, essentially a personal black swan event. According to the PenFed site, for “certificates having a term greater than 6 months up to and including 4 years - If redeemed within 180 days of the issue date or any renewal date, all dividends will be forfeited - If redeemed thereafter, but before the maturity date, dividends for the most recent 180 days will be forfeited.” So, a 6 months forfeiture. That’s not the end of the world, but it’s not great either.
Alright, decision time. Help me figure this out. What would you do in this situation? I’ve got an idea, but I would love to hear your thoughts.