I recently came across this article on AirfareWatchDog.com which made the fairly logical argument that if travel points are often valued at around 1.5 cents or less, why wouldn’t people just get one of those cash-back cards that gives you 2% on all purchases? In reality, it’s a win-win situation for the consumer but here’s why most of my favorite credit cards give me points that I can use towards travel instead of cash back.
Bonus Point Categories
Cash back cards often promote the fact that consumers don’t have to deal with the complexities of rotating categories. Instead, the simplicity of cash back cards is that they typically offer between 1.5% and 2% cash back on every purchase every day (I can hear Samuel L. Jackson’s voice in my head as I type this).
However, while it can be a little bit of extra work to monitor which cards are associated with specific bonus categories, the potential benefits are incredibly valuable. For example, the Chase Freedom card offers the option of 5x points or 5% cash-back on rotating categories each quarter. Most award travel bloggers value Chase Ultimate Rewards points at approximately 2 cents each so spending strategically each quarter gives you the equivalent of 10% back on each purchase! This is clearly a better return than taking the 5% cash back.
(Note: The Chase Freedom must be paired with one of the other Chase cards like the Chase Sapphire Preferred to extract this value. See this post for details on how this works.)
Further, many cards don’t have rotating categories and simply offer extra points for spending in certain categories. For example, though it comes with a higher annual fee, the Amex Platinum offers 5x points on purchases made directly with an airline among a myriad of other benefits. For those opposed to high annual fees, the Chase Sapphire Preferred offers 2x points on travel and dining expenses. These bonus categories are among the main reasons that both cards made the list of my favorite credit cards.
The vast majority of cards currently offer some sort of bonus. However, while the cash back cards typically come with a lower annual fee, they also typically have much smaller sign-up bonuses. Conversely, the travel rewards cards typically have an annual fee of $95 for the mid-tier cards and $450 for the premium cards but come with incredibly lucrative sign-up bonuses among a bunch of other travel-related benefits. So while cash back cards may offer a $100 sign-up bonus, the value of the sign-up bonus for a travel rewards card can be $1,000 or more.
The value of travel points can vary dramatically depending on how they’re redeemed. During my 6-month sabbatical, I redeemed 867,000 points/miles and extracted approximately $21,000 in value so I was able to get about 4 cents per point (or frequent flyer mile). However, if you dig a little deeper, you’ll find that some redemptions are significantly more valuable than others. For example, my flight back to the States at the end of the trip cost me 63,000 American Airlines miles but would’ve cost me about $4,000 if I had paid cash. However, to fly to Spain cost me just over 20,000 American Airlines miles for a flight that would’ve cost around $600. So, even for a single airline, the value of my miles ranged from 3 cents to 6 cents per mile… while most award travel blogs value American Airlines miles at less than 2 cents per mile.
The value of points or miles can vary dramatically from program to program. For example, Marriott and Starwood are currently combining their programs and Starpoints are converting to Marriott points at a 1-to-3 ratio. Fortunately, there are a number of sites that provide valuations for points and although these are highly subjective, I do think they serve a rough guideline for how much value you should be getting for your points (see TPG or OMAAT). If the consensus is that a certain company’s points are worth 1 cent, add the words “at least” to the beginning of that statement. In other words, if you aren’t getting at least 1 cent in value from your redemption from that particular program, you should likely just pay cash or try to find another option for using your points. For airline redemptions, I typically open up Google Flights and AwardHacker and place them side by side and figure out the best redemptions for my flights fairly quickly.
Counterpoint – The Case for Cash Back
The only cash back card I included in my list of favorite credit cards was the Fidelity Investment Rewards Visa card which offers 2% cash back. So what makes this card different? The card requires that you open a Fidelity investment account and the cash back that you earn each month gets automatically deposited into this account. With reports that 65% of Americans have nothing saved for retirement, getting into the habit of saving can be an incredibly valuable credit card benefit.
Not including housing expenses, the average American spends a little over $3,000 per month. If you put all of those expenses on your Fidelity Visa card, invested it and earned a 7% annual return on the $60 cash back that you would earn each month, you’d have almost $30,000 in 20 years just from your 2% cash back!! To figure out how much you could earn based on how much you spend, check out this online calculator.
Like anything else, your preference for cash back or travel points depends entirely on your objectives. If you’re trying to jump start your retirement savings, a cash back card like the Fidelity Visa card might make the most sense to you. On the other hand, if you aspire to travel and are looking for ways to make those trips more affordable, travel points can be incredibly lucrative. Of course, make sure you have a sound strategy when signing up for news cards and beware the perils of credit card churning!