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The Deal Mommy at Saverocity posted something with which I categorically disagree. She writes about a commenter that implored her to consider that miles are worth less than a cash back card would provide and while in some isolated cases that is true, proper redemption is often a far greater value than 2% cash back.
Here is the principle she was basing her ideal on, the “Bonnie” rule:
“When I first started blogging I fell into the “points are free” trap until I had a reader, Bonnie, ask me point blank what I could have gotten had I used a cash back card instead. I realized she had a point.”
She values points at just 1¢/point as a result (which seems odd to me as most cash back cards are now at 2%). She states openly in her comments that you can certainly gain value above the 1¢/point, 90% of readers won’t stay at aspirational properties (Park Hyatt Paris Vendome) or fly Lufthansa First Class.
If you find yourself as one of those that will never book awards for premium cabins. For everyone else, here are three examples that took me about as many minutes to demonstrate that prove her theory completely wrong.
British Airways Avios for short expensive flights like Pittsburgh to Philadelphia for $281 on a random Thursday.
In order to pay with a 2% cash back card with credit card spending and still fly for $276 ($281 – $5 taxes you would pay on the award) you would need to spend $14,000 on your cash back credit card. Or you could spend $4500 on an American Express card for example (assuming no bonuses for either purchase).
Sherpa 1, Bonnie 0
Oh Bonnie, as soon as we get to Business Class you don’t stand a chance. Bonnie needs to spend $166,000 on her card to offset the costs of that same trip, with an American Airlines credit card you would need to spend $110,000 – still staggering amount (except not because of bonuses) but I will address that shortly.
Sherpa 2, Bonnie 0
You can do math, enough said.
Sherpa 3, Bonnie 0
The Missing Link
The key missing factor for this entire process is that cash back cards don’t give you the head start that a mileage card would give you. I do not have any credit card affiliate links – this is not a post about encouraging your to sign up for a particular card but rather about the merits of mileage earning credit cards.
The Citi American Airlines Executive card gives a 75,000 miles head start for example. In the business class example to Beijing where a cash back card would require you to spend a staggering $166,000 on a cash back card, the Citi Exec would require $40,000 which is reasonable to do within a year and a half for most cities.
If you signed up for an American Express card you would crush that 4500 Avios requirement for the short but expensive flight from Pittsburgh to Philly with even a small 25,000 point bonus (there are 100,000 point bonuses currently available).
As for the Alaska flights to Puerto Vallarta, that would require just $10,000 in spending after the 25,000 point bonus as opposed to 17,500 with a cash back offer.
But Wait There’s More
These comparisons do not account for any of the other ways you might earn miles or points, like buying through shopping portals which award far more value in miles than in cash back. What about earning miles when you actually fly? Even a moderate flyer will accrue 10-15,000 miles per year, good luck doing the same with cash back.
What I find particularly annoying about this is the lack of evidence and the blanket statement:
No wonder so few people actually collect miles and points: the media is lying to them! People know when they’re being played, and it’s a fallacy that travel is free. I wish a more balanced picture were presented. How about something like “by strategic planning, careful budgeting, and leveraging promotions you can travel for less than half of what it would normally cost”?
If the media is filled with half truths what about the assumption that reward credit cards don’t come with substantial sign up bonuses that far outweigh those of cash back cards (if any).
My point isn’t to beat up on The Deal Mommy or her reader Bonnie – in truth, there are some times where 2% cards are a better choice (like if you fly Delta). Earning 2% rebates and using the rebates to offset travel costs instead of miles would earn status and miles for the flights, so in that regard cash back could be better.
What I resent is the crusade to fight the miles and points half truths by returning fire with cash back half truths. What works best for you may be a combination of both cash back cards and miles and points cards.
That’s only true for the beginner. For the person who’s well integrated into the miles/points business, you can get any sort of mile for less than 2 cents. Anyone who thinks you have to spend $166,000 for that business class ticket is an idiot, because you can easily purchase those 110,000 American miles for less than $2000 = $100,000 spend with a 2% cashback card. Likewise, your miles are very easily convertible to cash if you know the right people.
Advanced Miles/Points People – 3, Sherpa – 0, Bonnie – 0
Game, set, match!
@Adam – Thanks for reading and for your comment. I think you have only further made my point – though that would mean your scoring was incorrect 🙂 I agree that the Bonnie rule is a bad measure and that’s what I was hoping to demonstrate. I tried to only use only the metrics that the Bonnie rule allowed, which is only using ongoing spending for cash back over miles and points. I could not condone the sale of your miles to purchasers of such miles because it could cause your account to be shut down, but of course this is not a secret.
@Matthew – Lol
Good points. However, I will offer one rebuttal to the rebuttal – with mileage earning cards, you run the risk of depreciation, and in today’s environment, that risk is very, very real. In your example of the J class award to Beijing, sure, I could apply for the card, get the 75,000 mile bonus, and spend the $40k in a year and a half. But I also have little confidence that you’ll actually be able to redeem a J class award to China for 110k roundtrip a year and a half from now. Depending on how severe you think the depreciation rate will be going forward, you could come to the conclusion that cash back works out better longer term. FWIW, that’s why I stick with hybrid programs like Citi Thank You and Diners Club Club Rewards – it lets me hedge my bets with redemption opportunities in multiple programs, but with the easy out of a statement credit if everyone winds up copying SkyDrachmas.
The greatest value in miles is for international business class (or higher) awards and upgrades. Business class on the routes and times I am often looking for is closer to $6K, not $3K. Add in the bonus sign up miles and the amount you save not paying cash for tickets will always be much higher than the cash back. Though this assumes you want to travel in international business class in the first place. The value proposition is a lot closer for domestic award tickets.
I run a lot of expenses through my credit cards to earn miles and use the miles up fairly quickly, but still find they increase faster than I can use them (especially since I will pay cash when the international business is adequately discounted). Like the other poster, I am concerned that the miles situation will change over time. We have already seen international upgrade space shrink noticeably in the last few years, and awards seem to be following. I think that is largely a function of planes being more full these days, though that could also change.
@Meanmeosh – Certainly hedging with multiple currencies is important. Cash back is also a good tool to use in places, but applying only cash back is leaving cash on the table. I think the danger is for newbies who don’t know which view to trust. They should be using a variety of sources, Miles and points, cash back and even debit cards to travel cheaply.
@Arthur – I agree that most Business class seats run higher, but there are some good fares from the west coast to Asia and the east coast to Europe that always seem to drag down the average. Using the lowest price to prove that the math on cash back still doesn’t work should only further prove the point.
Thanks for reading, thanks for commenting.
If you’re scared of your account getting shut down when selling miles, you don’t know the right people. 🙂
I’m not saying that you’re wrong – a combination of cash and miles cards are good. But the fact is in a lot of cases, cashback is better for everyday non-bonused spend – and that doesn’t preclude you from getting airline/hotel cards for the signup bonuses. I’m just pointing out that you using a strawman argument to trumpet the value of last-minute avios/business class/etc. over cashback, and that’s logically flawed.
How did I miss this? Give me a heads up next time!
I get what you’re saying, but I write for beginners, unashamedly so. And I can’t tell you how many folks don’t even begin collecting miles because they know Ben and Bryan and Darius, etc. aren’t telling the full story.
I will say this, though: I get SO tired of the front of the plane bias. Sure I took 4 in first class to Asia this summer, but I did NOT get 10+ cents per mile because there’s no way I would have played first class prices. I got coach redemption value plus a nicer 16 hour experience. Both ends of the plane made it to Tokyo.
(And I forgot to mention I usually recommend UR or MR to start: convertible currencies give you the option to go either way without risking massive devaluation.)
@Dia – Thanks for reaching out. It’s great to write for beginners, but that’s why I think it’s so important that the record is set straight. I am glad we are able to hold some dialogue on this important topic.
The point you make that you would never pay for a business class seat at retail rates and therefore the value of 10x/point is not truly worth that to you might be true (I wouldn’t pay retail for business class without a tremendous discount either), but the fact that you got a “coach redemption plus a nicer 16 hour experience” is not really representative of your value proposition.
Using your logic, the first class seat adds to your comfort but you would not make an alternative purchase decision.
Except that you have.
If you say that the value of your miles is the value of a coach seat out of pocket, then let’s apply your own numbers to illustrate that. You stated that your tickets to Tokyo would retail for $1900. Using American/BA coach is at least half the price of first class (using American miles as you did, it would actually be 2.5x as expensive to fly in the front of the plane). If you are only using your points to replace cash purchases and you would only purchase coach tickets then you would have in essence thrown away $7,600 (4 tickets for another trip).
You willingly paid at least twice the amount of miles to fly in first as opposed to coach, and therefore taken away your own possibility for an additional coach ticket in the future costing you another $1900. Therefore, you actually spent (using your own model) $3,800 worth of miles for a ticket you are saying you would only have spent $1900 and the first class touches are just added bonuses. But they aren’t. They are worth more, and to you, they are worth twice as much.
That’s why I think it is so important that the message sent to beginners is correct. Our own (yours and mine) purchase decisions clearly indicate that we will sacrifice a future trip for the added comfort of this one. Your message is that there is no additional cash value to you for a business class ticket, but that is factually incorrect. Your use of miles (even at a $.01/mile valuation) demonstrates that those tickets are worth at least twice the cost of a coach seat. Even if we put in your value of $.01/mile, and state that first class would deliver a value of $1,300 that you would otherwise pay out of pocket, you could have gotten the same tickets for $500 on American using coach seats.
Do you see how you actually doubled the amount you would be willing to pay for a seat to Tokyo? The fact that were “thrilled” to do so would suggest to me that there is even more value to you than what you have let on.
As they say in improv: yes, and…
Here’s the straw that motivated me to write the post: http://abcnews.go.com/Nightline/video/nightline-912-moms-secrets-traveling-family-free-25476706
THIS is what I’m up against: misleading drivel. In two weeks last year the largest blog in family miles/points reviewed Park Hyatts both Vndome and Maldives!
So while we can debate minutiae it’s the greater good I have in mind. Overcome the barriers to entry. Then hit them with the fine print.