August 9, 2009

Is the Southwest Rapid Rewards Visa card a Good Deal?

I've had an airline rewards credit card in the past. They have pros and cons and generally I think that the cash value rewards cards are going to be a better value over all. But there are situations where an airline miles card is a good deal. So I've decided to evaluate a few airline miles cards and see if any would be a good deal for me. I'll start with the Southwest Airlines Rapid Rewards Visa card.

I've flown Southwest Airlines a number of times and they often have the cheapest fares. I usually only fly it to locations around the West coast. (that means going to Vegas) My wife has a friend on the East coast but unfortunately Southwest doesn't go to her city. Generally with Southwest I'd be expecting a fare in the $200-$300 range.

The Southwest Airlines Rapid Rewards Visa card works like this:
When you sign up you get 8 Rapid Rewards credits.
You can also get up to 8 more credits for balance transfers (1 credit per $1200 transferred)
You get 1 point per $1 spent.
1200 points equals 1 Rapid Rewards Credit
There is a $59 annual fee
You get 2 bonus Rapid Rewards credits per year.

Those are the basic elements of the card.

Note that I'm not looking at the % finance rate since I don't think you should be carrying a balance and if you have credit card debt then you should focus on paying it off. A rewards card should be used only if you're paying off the balance monthly. I'm also not sure about the quality of the bank that offers the card nor am I going to consider whether Southwest is a 'good' airline or not. If you don't like Southwest or the bank that handles their credit card then don't get the card.

What constitutes a Good Deal?

To evaluate if the Southwest card is a "good deal" or not you have to figure out what % return you are getting on the money you charge. Normal cash back rewards cards will get you 1-2% return. So for every $100 you charge, you will get $1-2 back in cash. If the Southwest card has a better % return on your use then its a "good deal". But if the Southwest card is 1% or less then its not a very good deal since you can find better deals with cash back rewards cards and not be locked into spending money at Southwest.

There are 2 key variables you'd have to figure : your annual spending and the dollar value of an airline ticket.

What is your annual spending?
This is the amount of charges that you put on your credit card per year. If you spend $1000 on most months then your annual spending would be $12,000

What is the expected dollar value cost of a trip on Southwest for you?
If your trips usually run $200 then the value of airline rewards are much less than if your trips cost you $500. So its important to know what your ticket costs would realistically be. This is how much it would cost you to buy a ticket on Southwest for a flight you would expect to take. This amount can be used to figure the dollar value equivalent of the Rapid Rewards. So for example if you'd only take Southwest to Vegas and those tickets run you $250 then thats your expected value. But if you routinely take Southwest form Arizona to New York then your tickets might run $450.

Value of rewards you would get in a year would equate to the points you'd get from expenditures / 16 * the value of a ticket. You get 2 free Rewards per year so you'd want to add those into the equation. You'd also want to reduce your cash value by the $59 annual fee. To find the annual % return on your spending you'd figure the cash value of the annual rewards and then divide by your total spending.

The full equation would look like this:

% return = (Ticket Cost * (((Spending / 1200 ) + 2 ) / 16 ) - $59 ) / Spending

Lets look at a couple examples.

Lets say you charge about $550 a month to your credit card and your typical fight on Southwest will run you $300. Then the formula would be :
% return = (Ticket Cost * (((Spending / 1200 ) + 2 ) / 16 ) - $59 ) / Spending
= ($300 * ((($6600/ 1200) +2)/16)-$59 ) / $6600
= ($300 * ((5.5+2 ) / 16) - $59) / $6600
= (300 * 0.46875 ) - $59 ) / $6600
= $140.625 - $59 / $6600
= $81.625 / $6600
= 0.01236
= 1.236%

Example #2.
Lets assume you spend abut $2000 monthly on your card and your trips usually run $400. This time I'll skip the full math. Then the equation would be:
% return = (Ticket Cost * (((Spending / 1200 ) + 2 ) / 16 ) - $59 ) / Spending
= ($400 * ((($24000/1200)+2)/16) - $59) / $24000
= 2.04% << == good deal

But on the other hand if your tickets run only $250 a trip then you'd get:
= ($250 * ((($24000/1200)+2)/16) - $59) / $24000
= 1.18% <<>

But if you only charge $300 a month then you'd get:
= ($250 * ((($3600/1200)+2)/16) - $59) / $3600
= 0.5% <<>

Roughly speaking if your typical ticket on Southwest is in the $250 range or less and your spending is over $9,000 then you're return on the rewards return on your spending is going to be around 1% range. To hit over 2% return on the Rapid Rewards card you'd have to be getting tickets than cost $400 or more. The exact answer will depend on the combination of your spending and the ticket costs.

If you would expect to fly on Southwest with a fare that is around $400 or more than a Southwest Rapid Rewards Visa is a good deal. But if your ticket costs are lower then there are better rewards credit cards.


  1. I used to have a Delta SkyMiles card. Then they started charging an annual fee and I dropped it. As it was, it was hard to use the points they gave unless you spent extra points to avoid blackouts or to get a premium ticket. Also, it was American Express, which wasn't accepted as widely as Visa/Mastercard.

    I now have a Cap One card. Rewards are available on any airline and the rate is about 1.25%.

  2. Your formula is written incorrectly, mismatching left and right parenthesis. Come ON!

  3. Thank you to above Anonymous commenter, I was in fact missing a ( in the formula and I've now corrected it.

  4. This was helpful, the only thing your leaving out is SouthWest gives you an additional credit for each flight, so if you fly SW anyways its a nice added bonus to get 2 credits per roundtrip, plus the 2 annual credits, thus saving essentially $2400.00 or the cost of 2 credits

  5. This is exactly the analysis I was hoping to find. Have you looked at the rr sw visa now that it has changed?

  6. Charles, I took a very quick look at the new Rapid Rewards system. It looks like the credit card could be a slightly better deal now. The points are accumulated the same way with the credit card. But with the new system you can now get some flights for fewer points.

    On the other hand with the new system flying normal trips with Southwest doesn't give you as many points as you used to get for shorter & cheaper flights.



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