Programs: AA Plat 2MM, Delta Silver, Hilton Gold, SPG Gold
Posts: 2,656
Behavioral Economics and the Price of Miles
I got an email from American recently about a bonus for buying miles. The bonus tops out at 15K miles for a purchase of 40K miles for $1,000. So 55K miles for $1,000. That's almost $.02/mile. That sounds too high to me. I like to redeem at that level, but I can't imagine paying it.
So then I think it through, and I realize that I AM paying it, every time I use my AA Visa instead of my Schwab 2% Cashback Visa. If I use my SPG Amex, it isn't quite $.02/mile - I think it calculates to $.016/mile.
Next step is to say, if I want to use my AA Visa to get these miles, then I should definitely fork over the $1,000 as that's a slightly better return since I get 55K miles. But I'll never do that.
So this brings me back full circle to say that I should never, ever use my AA Visa, beyond the amount of charges it takes to get me over the initial bonus - or $750.
The only potentially mitigating factor here is that I want to reach 1M miles on AA to get lifetime Gold status. I'm at about 250K now. But the opportunity cost of using an AA Visa to get there is just too great.
Unfortunately, I convinced myself of all of this after charging $29K on the AA card, where I now realize I should have used my Schwab.
I've had similar thoughts with respect to the DL Reserve Amex. However, the situation is a bit different. For me, the 1.5 RDMs and 0.5 EQMs per dollar spent (assuming you reach the $30,000 spend threshold bonus) outweigh a 2% cashback or ~2 cent starpoint for a dollar of spend.
Either way, I've convinced myself that I get more pleasure from points/miles as redeeming them psychologically feels "free" where as the cashback goes right to my bank account and I have a hard time spending it as if it were free money. In the end, points/miles make me happier.
I got an email from American recently about a bonus for buying miles. The bonus tops out at 15K miles for a purchase of 40K miles for $1,000. So 55K miles for $1,000. That's almost $.02/mile. That sounds too high to me. I like to redeem at that level, but I can't imagine paying it.
So then I think it through, and I realize that I AM paying it, every time I use my AA Visa instead of my Schwab 2% Cashback Visa. If I use my SPG Amex, it isn't quite $.02/mile - I think it calculates to $.016/mile.
Next step is to say, if I want to use my AA Visa to get these miles, then I should definitely fork over the $1,000 as that's a slightly better return since I get 55K miles. But I'll never do that.
So this brings me back full circle to say that I should never, ever use my AA Visa, beyond the amount of charges it takes to get me over the initial bonus - or $750.
The only potentially mitigating factor here is that I want to reach 1M miles on AA to get lifetime Gold status. I'm at about 250K now. But the opportunity cost of using an AA Visa to get there is just too great.
Unfortunately, I convinced myself of all of this after charging $29K on the AA card, where I now realize I should have used my Schwab.
Rational behavior is a ......
Do I have this logic wrong?
I wouldn't say wrong...as it's really quite subjective. The only thing I would have done differently is put that $29k on the SPG card instead of the AA card. That way you can earn your 1 million miles 25% faster.
For me the value is greater on the SPG than the Schwab. $60k in spend on the Schwab is $1,200 in your pocket, which certainly isn't bad. But on SPG that's 75k AAdvantage miles which is a First class ticket to Hawaii. You could probably find a $1,200 ticket in coach...but if you were to pay to sit up front it would likely cost you 3 times as much. So while 2% cash back is a nice feature, I still haven't been able to convince myself to get the Schwab card.
Since you are in LA you might need to swap Hawaii with a destination in Europe to get the same bang for the buck...I just used Hawaii as an example that works for me, living on the East coast.
The OP's logic looks sound to me, and I've had this same conversation with myself for quite a while. Another factor is the time value of money in your pocket (worth something) vs. the time value of miles in a FF account (likely negative, as all programs devalue to some degree, sooner or later). Still another consideration is that there are no capacity controls with cash, as Delta SkyMiles members are learning the hard way. There is also the matter of orphaned miles-those accounts with a few thousand miles or points that you'll never use-no value there. Each of these often overlooked factors tilts the decision to take cash, not miles.
But it also depends on value received when using miles. There are many who kid themselves into wild valuations, using trips like F travel to Asia that are rarely taken using the bulk of most FF's miles. But even a realistic assessment of usage can push value higher than 2 cents. Booking a trip with long stopovers can add a lot to a cash fare, but are often free on awards booked well.
At the end of the day, I try to use credit card purchases as a tactical tool that does more than rack up one mile for a dollar charged. The now-weakened Citi card churn and the current BA Chase Visa deals are two examples, and there are others like coins and bank deposits that many have gone after.
But I think the OP's point stands: It might be less fun, but in a lot of cases a clear-eyed, number-crunching analysis would show a 2% refund to be the best deal, along with being the easiest and surest path.
Programs: UA 1P, Marriott Plat, and a mug on the wall at the local brewpub
Posts: 258
Quote:
Originally Posted by nfg05
Either way, I've convinced myself that I get more pleasure from points/miles as redeeming them psychologically feels "free" where as the cashback goes right to my bank account and I have a hard time spending it as if it were free money. In the end, points/miles make me happier.
It depends on what you value more: short-term happiness, or long term financial freedom. The very fact that you have a hard time spending money in your bank account like you do FF miles means that money will be there in the long run, maybe when you need it.
But, in the immortal words of Keynes, in the long run we are all dead.
Horace agreed: "Carpe diem quam minime credula postero" (seize the day, trusting as little as possible in the future).
Solomon would have approved: "Enjoy life with your wife, whom you love, all the days of this meaningless life that God has given you under the sun— all your meaningless days."
Of course, Solomon's quote clearly does not apply if you are travelling alone. What a depressing thought.
I must be missing something.I only use AA miles for One World Awards Usually
OW190 We have done this on more than one occasion to go around the world
16 flight segments, 30-35,000 air miles Roughly equal to a 4 Continent Business Class ticket priced at over $9,000. In any case You should never get less than four cents a mile ticket value on multi stiop Business Class International tickets
RE Credit cards BA Explorer offering duplicate reward tickets and 100,000 sign up bomus best I've ever been able to get
Programs: Editor and webmaster, www.freefrequentflyermiles.com
Posts: 2,080
I acquire credit cards for the bonuses. But I spend on my Schwab and PenFed cards. The tax free money I receive from the latter would pay for the tickets I would actually buy from an airline.
I would never actually pay money for a business or first class ticket, though I do pay miles for these. Instead of paying the huge prices airline want for these seats, I would pay for a cattle class seat and go a day early, staying in a nice hotel at my destination to recover from the experience. The hotel would cost way less than the extra cost of a premium seat.
I've had similar thoughts with respect to the DL Reserve Amex. However, the situation is a bit different. For me, the 1.5 RDMs and 0.5 EQMs per dollar spent (assuming you reach the $30,000 spend threshold bonus) outweigh a 2% cashback or ~2 cent starpoint for a dollar of spend.
Either way, I've convinced myself that I get more pleasure from points/miles as redeeming them psychologically feels "free" where as the cashback goes right to my bank account and I have a hard time spending it as if it were free money. In the end, points/miles make me happier.
+1
for me too i came to the same conclusion that cash back card is "financially better" but that the miles/hotel points encourage me to go on vacations and explore the world and give me something to look forward too..like the poster above i have enough cash going into investments,savings etc..and once its there i dont like to take it out so it becomes imprisoned in a way...especially when i begin to factor in the costs of the annual fees..
A couple of other factors, I travel some for work, but not enough to get mileage for an award, my ff credit card leverages those miles to get enough miles for award travel. Also if you card helps to get you status, that multiplies your miles and reduces fees for things like baggage.
Programs: AA Plat 2MM, Delta Silver, Hilton Gold, SPG Gold
Posts: 2,656
Quote:
Originally Posted by broadwayblue
I wouldn't say wrong...as it's really quite subjective. The only thing I would have done differently is put that $29k on the SPG card instead of the AA card. That way you can earn your 1 million miles 25% faster.
For me the value is greater on the SPG than the Schwab. $60k in spend on the Schwab is $1,200 in your pocket, which certainly isn't bad. But on SPG that's 75k AAdvantage miles which is a First class ticket to Hawaii. You could probably find a $1,200 ticket in coach...but if you were to pay to sit up front it would likely cost you 3 times as much. So while 2% cash back is a nice feature, I still haven't been able to convince myself to get the Schwab card.
Since you are in LA you might need to swap Hawaii with a destination in Europe to get the same bang for the buck...I just used Hawaii as an example that works for me, living on the East coast.
Right - if I could have charged the $29K on SPG, I would have. They didn't take Amex (smart, in my opinion).
I fully understand the logic as applied to first class tickets that you'd otherwise pay for. I'm just not in that league. I might do F one day, but I'd never pay for it. I guess if it were 30% more than coach, I'd consider it, and maybe that's your point: with miles, it's not that much more than coach - at least not as wide a gulf as when paying in dollars.
Programs: AA Plat 2MM, Delta Silver, Hilton Gold, SPG Gold
Posts: 2,656
Quote:
Originally Posted by Mountain Trader
The OP's logic looks sound to me, and I've had this same conversation with myself for quite a while. Another factor is the time value of money in your pocket (worth something) vs. the time value of miles in a FF account (likely negative, as all programs devalue to some degree, sooner or later). Still another consideration is that there are no capacity controls with cash, as Delta SkyMiles members are learning the hard way. There is also the matter of orphaned miles-those accounts with a few thousand miles or points that you'll never use-no value there. Each of these often overlooked factors tilts the decision to take cash, not miles.
That's one of the great features of the Schwab card that miles cards don't have and even other Cashback cards I've had don't have: the orphan miles/points/dollars problems. You get the 2% back each month, no min, no max, no quanta you need to reach to redeem.
Programs: A flying Kettle for 2012! Priority Club Gold, National EC Exec, Amtrak
Posts: 1,447
I did my own pondering on the value of a mile recently. I have both the AA Citicard and Chase Freedom (1.1% plus 10 cents per transaction) and came to the conclusion that $20+ is my personal tilting point for taking miles over cash. At that point my reward is either 32 cents or 20 miles, 1.6 cents per RDM.
There are other benefits though. What is the value of achieving lifetime status? Probably in the thousandths of a cent range per mile, but a trip of a million miles begins with a single iDine. I also like having the ability to travel on a whim with my "free" tickets.
__________________
Oh no, ancient Atlanta was more than just a Delta hub.
Right - if I could have charged the $29K on SPG, I would have. They didn't take Amex (smart, in my opinion).
I fully understand the logic as applied to first class tickets that you'd otherwise pay for. I'm just not in that league. I might do F one day, but I'd never pay for it. I guess if it were 30% more than coach, I'd consider it, and maybe that's your point: with miles, it's not that much more than coach - at least not as wide a gulf as when paying in dollars.
Right, I would never "pay" for F either. But I do value a F ticket from LGA-OGG or a J ticket from JFK-IST (using miles in either case) as a better deal than the $1,200 or $1,600 I could choose to earn instead were I to go the cash back route...particularly when the coach fares for either of those flights are often pretty close to that price in the first place.
Your logic is sound, but only if you weigh *all* of the benefits received via the affinity cards versus the cashback cards. Comparing 1 point/mile per dollar spent versus 2% cash back is not the full picture, in most cases. Here are two major aspects that are easy to overlook:
1) Airline/hotel cards often earn more than one mile per dollar spent. If you can average, say 1.5 miles/points per dollar spent through the year, and you value them at 1.5 cents each, you are better off earning the miles/points versus 2% (or 2 cents) cash back per dollar spent. For example, if you sign up/qualify for a promo or ongoing offer that provides incentive miles beyond 1/$, or you spend on goods/services that regularly earn more than 1/$, you can easily achieve 1/5 miles/points per dollar and beyond as your average. I top out my Amex Delta Reserve spending at $60K per card, meaning that with the RDM bonus of 30K, I wind up at 1.5 miles per dollar spent.
2) Airline/hotel cards often earn something beyond just RDMs. Several airlines and hotel chains allow you to earn elite qualifying miles/nights/status through spending. For those of us who assign substantial value to the status, it can easily tip the scales in favor of the miles/points cards over cash back. For example, through my business spending, I earn enough MQMs on Delta through credit card spending alone to put me at PM status, and with the new Chase Marriott offer, I will be achieving Platinum with them as well.
Also, for anyone looking for cash back, Fidelity also offers a 2% card. I use them for my investments and much prefer them to Charles Schwab, so anyone in the same boat might consider it.
__________________ 17% off + bonus points + additional discounts on all Marriott stays. See this master thread for updated details.
Also, for anyone looking for cash back, Fidelity also offers a 2% card. I use them for my investments and much prefer them to Charles Schwab, so anyone in the same boat might consider it.
But also note that the Fidelity card, which used to offer no foreign currency and similar fees, now imposes those fees. The Schwab card does not.
