January 11, 2014

Miles & Points vs. Cashback

A lot of people have asked me why they should switch from a cashback (or a debit card) to a miles/points earning credit card.  Everyone is in a different situation but generally speaking, all of us like to travel in some capacity.  You might like to travel to weddings, family gatherings, business travel, domestic vacations, international vacations, or all of the above.  Here are my thoughts on why you can derive so much more value from leveraging the variable valuation of points and miles cards for your everyday spend.

The top cashback card on the market right now is the Barclays Arrival(TM) World MasterCard.  The annual fee is waived for the first year ($89 thereafter) and offers a 40,000 point sign-up bonus and 2% cashback on everyday spend.  In addition, you can get an additional 10% back on your travel "redemptions" effectively making the rebate 2.2% back on spend.  So once you're received the signup bonus, you are capped at a 2.2% return on your spend because cashback is cashback.  You can't redeem the "points" for something that varies in cost like a plane ticket or a hotel night. And that is the best deal on the market (ignoring periodic 5x bonuses that Chase Freedom and Discover cards offer in specific categories).

With miles and points earning cards, your rebate on spend is not capped because 50,000 points can get you a bunch of hotel nights at varying costs or a first class plane ticket.  Additionally, there are numerous cards on the market that offer signup bonuses (and the bonuses seem to be far stronger) while there are limited opportunities to benefit from signing up for cashback cards.  Imagine this hypothetical example:

  • 2 adults sign-up for one credit card each and earn the sign-up bonus
  • 2 adults spending a total of $2,500 per month on everyday items like clothing, food, travel, transportation, insurance, etc...
  • Assume 50% of the spend is travel and dining and 50% is not
  • Assume the family wants to travel to Mexico for a few days after one year of spend and use the points/cashback earned from spend to pay for the trip

If all of the spending (for the full year) was put on the Barclays card, including the signup bonuses, you would have $1,510 in "cashback" to spend on your trip to Mexico.  Flights to Mexico from Denver run about $600/person depending on location and time of year.  So now you have $310 left over for hotels, rental cars, etc...That will probably get you one night in a nice hotel or two nights in a lesser property.  None of your food is paid for.  Certainly doesn't pay for your entire vacation.

Flights from Denver to Cancun during March of 2014


If all the spending (for the full year) was put on a card like the Chase Sapphire(R) Preferred, (my favorite points earning card) including the signup bonus and 7% dividend you would have 144,450 Chase Ultimate Rewards points.  70,000 miles get you two roundtrip economy award tickets from the US to Mexico.  Now you have almost 75,000 points leftover for a hotel.  Want something nice that also includes food?  Hyatt just opened a beautiful new property in Cancun.  And it is all inclusive.  It requires 25,000 Hyatt Gold Passport points (which can be transferred from Chase UR) per night so three nights are paid for.  And so is all of your food and drink.

Hyatt Zilara Cancun requires 25,000 Hyatt points per night



This is a great example of the power (and variable nature) of miles and points.  Even forgetting the signup bonuses, miles and points have an "uncapped" value when redeeming vs. cashback that is limited to the published percentage tied to the card.  I consistently get 5 (and sometimes 10) percent back on my spend when redeeming for flights and hotels (more on these redemptions and how to book them in future posts) While I wouldn't pay the going rate for an international first class ticket to Asia ($5,000 and up) I would pay $2,000 since that's about the price of an economy ticket.  I can redeem 67,500 United miles for that ticket in first class and route through Europe (with a stopover) to see another part of the world on my trip.  In that example, each point is generating three cents in value which is far better than 1% or 2% offered by most cashback cards.  The actual value (on the $5,000 ticket) is more like seven cents!  Your "return" is even better if you consider that you might have only spent 50 cents to receive 2 points.

I will have more "milenomics" examples centered around point valuation and some of my best redemptions in the next few weeks.  Let me know if you have any questions!

No comments:

Post a Comment