TD Bank executive says credit card rewards should be chosen like Warren Buffett chooses investments

For people who favor simple, low-maintenance investing, the appeal of the three-fund portfolio is clear: a mix of bonds, U.S. stocks and international stocks, then little else to manage. For those who prefer not to handle investing on their own, a financial adviser can make the choices, though that usually comes with higher fees.

That same tradeoff, according to TD Bank’s head of credit cards and unsecured lending, Chris Fred, applies to credit cards. Some consumers may want to chase categories, points and premium perks, while others may be better off choosing a straightforward cash-back card with a simple reward structure.

Fred said the idea is similar to Warren Buffett’s well-known “circle of competence”: stick to what you understand and avoid spending time on strategies that are too complex or too costly to manage well.

“Just like Warren Buffett says to buy the index fund, a good flat-rate card often wins out over all the fancy bonus categories,” Fred told Fortune.

In practice, Fred said, people who know how to optimize rewards may do well with multiple cards and different bonus categories. But the average consumer often ends up better served by a card that offers a dependable return on every purchase rather than one that requires constant tracking.

Why maximizing rewards can be harder than it looks

Credit card “churning” and reward optimization have been around in different forms for years, even if the terminology is relatively modern. In the early days of consumer finance, banks used bonuses to attract savers, and promotional tactics have long been part of the financial industry.

In the credit card world, reward chasing remains popular among enthusiasts, including the large online churning community that discusses strategies and warns ordinary consumers that the effort may not be worth it.

“People think, ‘I can always beat that 2%.’ On average, they don’t,” Fred said.

He pointed to TD Bank’s own card lineup, which includes a flat 2% cash-back card and other products that pay 1% on everything plus higher rewards in selected categories. Compared with cards that force users to decide which one to pull out at the gas pump, restaurant, or store checkout, Fred said the math and effort can become more trouble than they are worth.

A premium card may offer a strong return on dining and groceries, but lower rewards on pharmacies, travel or everyday essentials can offset those gains. Once a consumer starts juggling several cards, Fred joked, it can require a spreadsheet just to make sure the best one is used for each purchase.

How annual fees change the equation

The cash-back-versus-points debate is only part of the story. Annual fees, especially on premium cards, can add another layer of pressure to use every benefit the card offers.

“The higher the fee, the more benefits you tend to have,” Fred said. “It’s a dangerous proposition: You’d better start using those benefits, or it’s going to be really hard to justify the fee.”

Some premium cards charge close to $1,000 a year, while advertising value worth far more in perks if the cardholder actually uses them. Those benefits can include monthly food or rideshare credits, hotel credits, early access to restaurant reservations or entry to special events.

Fred said these cards are often structured to encourage engagement. Many offers must be activated through a portal instead of being applied automatically, which helps keep customers invested in the product.

“Those customers are sticky. They know they’re spending a certain amount each year in annual fees, so they’re vested,” Fred said.

Fee increases are also spreading to more basic products. American Airlines recently raised the annual fee on its Citi AAdvantage Platinum Select World Elite Mastercard from $99 to $150, the first increase since 2018. The business version of the card is now priced at $150 as well. In return, cardholders receive benefits such as triple miles on hotels booked through American’s portal, up to $120 toward Global Entry or TSA PreCheck every four years, and a $100 annual statement credit for in-flight purchases that replaces the old 25% discount on food and drinks. United and other rivals have also lifted fees on similar cards, pushing some entry-level airline cards closer to $150.

TD Bank’s recent Merry Money Survey found that 79% of consumers are actively looking for coupons, sales and deals, while 72% of credit card users planning holiday spending expect to apply rewards to those purchases. Fred said that kind of behavior helps explain why rewards programs remain so appealing to cardholders.

Third-party partnerships add another layer of value, giving card issuers and customers more reasons to justify high annual fees.

“They believe they’re going to get a good deal if they keep that card and use it—and that’s what makes these ecosystems so powerful,” Fred said.

A version of this story was published on Fortune.com.

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