In the comments from last week’s post about credit card strategies for low-to-average spenders, I noted that (outside of signup bonuses) the miles you earn on credit cards are not free – you are paying for them by not getting cash back. I think is an important point, and I wanted to call it out beyond the comments section.
I mentioned the Fidelity Investment Rewards Amex, which offers 2% cash back on all purchases. By choosing not to have this card, you (and I, as I don’t have that card either) have made the decision to forgo 2% cash back on all purchases.
Let’s look at the numbers:
Assume for a moment that you spend $7500/month on your everyday card. That’s significant spend, and you’d end up with 90,000 points in most programs after a year. In my case, I’d have that in Starwood since I have the Amex SPG card. I could keep those in SPG or transfer them to an airline for 110,000 points. But let’s also look at putting that on the Chase Sapphire Preferred, since that’s a favorite of many. I’ll even assume there that you’ve got 25% of your spend at travel and restaurants where you’re getting double points. Add in the 7% end-of-year bonus and you’ll have 120,375 Ultimate Rewards points.
A cashback card would earn you $1800 cash at the end of the year.
Let me put it out there: Those 120,000 points (or 110,000 miles) you earned are not free. You bought 120,000 points for $1,800, or 1.5 cents per point. Maybe that’s a good deal depending on how you use them, maybe that’s not. But it’s not free, and we should stop referring to them as free.
I had argued in the post last week that for low-to-average spenders, a cash back card is preferable as your everyday card to any points earning card.
I’ve thought more about this, and I think that, depending on your travel patterns, many others are also better off with the 2% cashback card than with a points-earning card as your everyday card. (Don’t confuse this with getting a card for the signup bonus – you should absolutely be getting different cards for signup bonuses, assuming your credit score can handle it and you’re paying off the balance). I’m talking about which card to use when you’re not trying to meet the minimum spend for a bonus.
I know this is heresy among the travel bloggers out there, and like I said, it’s advice that I have not been following. But when I did the math, the choice of cashback card vs. points card wasn’t so obvious.
On the upper end of how you can use those points, it can be a good — or even great –deal. Those Ultimate Rewards points can be turned into 4 nights at the Park Hyatt Paris-Vendôme, with a value of $4,000. Effectively you’re getting the hotel at half price. 110,000 miles in several programs will get you a business class ticket to Asia, which can cost upwards of $8k (though it may also be $4k on the bottom end). Again, you’re getting pretty good value there, assuming those are the types of ways you’d use those miles.
(Though another way of looking at it is that you could buy 2 coach tickets to Asia for $1800 rather than the 1 business class ticket you’d get with the miles. I know many can’t imagine flying in the back to Asia, but for lots of other people 2 tickets in coach will suffice).
Plenty of travelers, though, don’t use miles for business class tickets to Asia. Maybe they’re using the points domestically to take their family to Florida. You’ll get 4 tickets to Florida with those 110,000 miles, meaning the tickets cost you $450 each. Not great.
Or maybe you’ll head to the Caribbean – on some airlines you’ll be able to get 4 tickets there with the 120,000 miles (though on others you’ll only get 3 tickets). Again, they’ll cost you $450 each. Perhaps that’s a bit better, but it’s not at all a free ticket. It’s a $450 ticket.
To sum up:
First, there is almost no reason to have an airline-specific card as your daily card. Why would you take 1 point per dollar spent (what you earn from nearly all airline cards) when you can get 1.25 miles through SPG usable on a bunch of airlines or the 2X bonus on travel and restaurant spend on the Sapphire card? I can’t think of any scenario where you are better off with an airline card as your everyday card than you are with SPG or Sapphire. It may still be worth getting the United Explorer card to get the Elite-style benefits, sure. Just don’t put your spend on it.
Second, the choice of whether you choose cashback or a points card really rests on how you plan on traveling. You are tying up a fair amount of money in a points program by putting your spend on one of those cards. If you have ambitious travel plans, then by all means it will be worth it to you. But you really have to think about how you spend those points. Most people are not doing business class flights to Asia, with a stopover and one way via the Atlantic and one via the Pacific. If you are, awesome – your choice is obvious. But do you find your points going to flights to San Diego? I’d step back and do the math.