Location: Saipan, MP 96950 USA (Commonwealth of the Northern Mariana Islands = the CNMI)
Posts: 8,826
It all comes back to the term "opportunity cost." I took basic Economics many years ago at the Naval Academy, as well as Money & Banking and International Trade & Finance, so I think I recall the concept, however vaguely.
Nevertheless, I don't think you can call an opportunity cost part of the "real" cost of credit-card-obtained miles. Because however much you argue that you are not trying to decide whether cashback cards are better than affinity cards, that comparison is precisely the point of the whole concept of "opportunity cost": what you give up by choosing one alternative over another.
From the point of view of an accountant (which I am not), the only relevant cost in calculating your basis in the miles (expressed either in cents per mile or total dollar value of a block of miles) is your out-of-pocket expense.
Otherwise we could be engaged in theoretical games about whether I had a chance to invest in a hot stock, and should have done so, paying cash for my first class ticket. I hope an economist or accountant can expand on this, but a basic principle of science and engineering is keeping one's units straight.
In this thread we are mixing apples and oranges. Compare input to input, or output to output, but don't subtract from one side of the equation and add it to the other.
Speaking of cashback, I have a cashback of up to 2.5% through a Navy Federal Credit Union (need to have been in the Navy or Marine Corps, or a relative, or otherwise in field of membership) VISA. It can only be used to buy airline tickets through the designated travel agency--normal advance purchase discounts--in steps of $300, $500, $1000, or $1500, still earning miles.
I only use it as a backup to my Diner's Club and Amex, and because of the telephonic (and now online) account payment convenience going back ten years. I tried to take Randy's advice and get a NW Visa, but they wouldn't issue in the territories (AS, GU, MP, PR, VI). Sometimes we have to play the hands we're dealt.
I agree that there is some cost to the CC obtained miles, but in many cases the cost is worth it.
Another point to consider is that the more lucrative cashback deals always seem to be teaser deals - offered one year and withdrawn the next year. And I like the constant return of the mileage cards - regardless of how much you charge you get a fixed percentage back. Many of the cashback cards are tiered - so you do not get a fixed percentage return, rather the return depends on how much you end up charging.
ynewman, I am with you but you will never convince most of these FF-obseesed flyers.
Also, what you are leaving out is that if you have status in a program, the points in that program have far greater value. For example, it costs 25K points to fly domestically on an award, but what 20K to upgrade to first class. That upgrade arguable is worth several hundreds or over a thousand dollars, whereas you would get two cents per mile or $400.
<font face="Verdana, Arial, Helvetica, sans-serif" size="2">Originally posted by LemonThrower: ...it costs 25K points to fly domestically on an award, but what 20K to upgrade to first class. That upgrade arguable is worth several hundreds or over a thousand dollars, whereas you would get two cents per mile or $400.</font>
We all have our own opinions, but to me Business/1st Class is GROSSLY overrated. I'd much rather sit in the back of the bus with the $400 cold hard cash in my pocket, and that's regardless of whether I'm going on a quickie like STL-ORD or if I'm going long haul like LAX-SYD.
I can't buy Randy's argument, because rebate dollars are REAL AMERICAN DOLLARS, and flight value is non-fungible funny money.
By his analysis, he is almost implying that an airline will pay you $4,000 if you downgrade from a first class ticket. Since tickets and upgrades are not transferable back into cash, the comparison starts to fall apart quickly.
Cash does not:
- charge a $75-100 fee for changes in your plans
- restrict your usage to particular times and dates
- go bankrupt and cancel your value
- change the program plans/take the value away as it sees fit
We know Randy is extremely wealthy and can pay the money for the upgraded flight, but if he walked up to people on the street and offered a choice of a first-class ticket to Hawaii or a stack of 30 one-hundred dollar bills (tax-free), what do you think the outcome would be? Most everyone would choose the cash, hands down.
There's your appropriate comparison. If there was a way to easily convert miles to 2 cents, you would see trillions of miles being converted to billions of dollars.
I have a Discover Card that gives you "up to 2%" cash back. IMHO, points and miles are much more fun. FT provides some great ideas to maximize both point/mile earning and spending opportunities.
It's nice to take a family vacation with free airfare and hotel room.
<font face="Verdana, Arial, Helvetica, sans-serif" size="2">Originally posted by yanxfann: We all have our own opinions, but to me Business/1st Class is GROSSLY overrated. I'd much rather sit in the back of the bus with the $400 cold hard cash in my pocket, and that's regardless of whether I'm going on a quickie like STL-ORD or if I'm going long haul like LAX-SYD. </font>
For many people, flying long-haul in F/C is almost like adding another day onto the trip. For businessmen, the F/C seat is mandatory so one is not tired when arriving at the destination. For tourists, it adds another vacation day onto the trip. Arriving at 8am on the other side of the world is much different if one has been sleeping [and able to sleep!] for several hours rather than trying to stay comfortable and watching a movie.
The whole idea of opportunity cost is to determine what you're giving up by choosing a particular course of action. I don't disagree with ynewman's OC for using a rebate card, but I would gladly give up 0.94 cents/mile on a rebate card to keep the miles/points. It all comes back to what value you place on your points/miles, and that topic's been beaten to death.
I think Tino's cracks about Randy's wealth and lack of common touch are uncalled for. But I agree with his premise that miles aren't worth what you "might" use them for, but rather the actual cash you save by earning and using them.
If you never pay cash for that $3,000 Bus seat to Europe, how can you say the 80,000 miles you use to get that seat are worth $3,000? They obviously aren't worth it to you.
I find this thread a fascinating tribute to that unamed guy at AA who came up with the first FF idea 20 years ago. Here we are, two decades later, still trying to figure out the value of seats that in many cases would've gone empty. That guy was pretty smart-and so was Randy for turning this into a business.
<font face="Verdana, Arial, Helvetica, sans-serif" size="2">Originally posted by ynewman: But here's an example of calculating the cost of "free miles": FUSA United Mileage plus pays 2 miles for each dollar spent 8/1-10/31. I estimate that I'll charge $28K during this period, which with the double miles and 10K promo translate to 66K miles. The costs: $60 in annual fee, plus $560 (2% of $28K). So I'm paying (or not earning, which is the same thing) $620 for 66K miles, or 0.94 cents/miles. Not bad, but not free either.)</font>
Let's exclude the special double-miles promotion. You have three basic card choices:
1. No-fee card with no benefits
2. Rebate card
3. Airline card
The easy way to do this is to simply ask whether your cents/mile return on an airline affinity card will exceed the cash rebate percentage. But here's a more detailed example assuming you spend $60K/year (change this number according to your own spending):
1. No-fee card. No fees, no mileage/rebate. Net: $0
2. Rebate card: Assume no fee and 2% rebate. Net: $1,200 (2% of $60K)
3. Mileage card: Assume $90 fee and 3 cents/mile. I know the cents/mile is debatable but it can cost $1,000 to go from the midwest to Hawaii ($1,000/30K miles on DL = 3 cents/mile). Net: (60K x .03) - $90 = $1,710
Simply insert your own fees and redemption rates in the above example to see your specific result.
One note that's only briefly been addressed: Having an airline-affinity card can produce enormous bonuses not offered with rebate cards. For example, a NWA Visa offer this year allowed users to earn a bonus as high as 75K for charging NWA tickets to their cards.
[This message has been edited by Family flyer (edited 08-02-2002).]
Programs: AA 2 MM LIfetime Platinum, SPG Gold, Hilton Gold, BA
Posts: 3,548
I think ynewman's point is that you are "buying" miles - that's all. If I go to a retaurant that gives me 20% back on my diner's club 1 $10 meal only cost me $8, or I can get 100 miles - then I am "buying" 100 miles for $2. He's not telling you what to do, he's just pointing out depending on your options, that is what you are doing. Since, personally I am aiming for lifetime platinum with AA, I choose to buy my 100 miles for $2 in those restaurants where I have that choice. Once I achieve my goal, I'll probably decide to get my $2 discount because I'll have so many miles. Yes, how you use your miles determines if is is worth it to you to get, let's say, 10K miles for $200, 100K miles for $2000.
1. No-fee card. No fees, no mileage/rebate. Net: $0
2. Rebate card: Assume no fee and 2% rebate. Net: $1,200 (2% of $60K)
3. Mileage card:
Net: (60K x .02) - $90 = $1,110
at 1 cent per mile (factor in cost of capacity controls, etc.)
1. No-fee card. No fees, no mileage/rebate. Net: $0
2. Rebate card: Assume no fee and 2% rebate. Net: $1,200 (2% of $60K)
3. Mileage card:
Net: (60K x .02) - $90 = $510
<font face="Verdana, Arial, Helvetica, sans-serif" size="2">Originally posted by Mountain Trader: That guy was pretty smart-and so was Randy for turning this into a business. </font>
I agree completely. But as much as I greatly respect Randy, I know that he is also severely conflicted in his comments with respect to the value of a FF mile.
Randy advises companies on FF programs and their value to the masses, so why isn't in his best interest to be the perpetual optimist? The day I see him say "XXX's program is practically worthless due to their restrictions and customer unfriendliness", I'll fall off my chair.
I'm an advisor to corporations as well, and I know not to publicly bite the hand that feeds me, and Randy's forums are as public as it gets.
Back to credit card freebies:
Does anyone know of a card that provides a 2% flat rebate in cash? I'm leery of any cards that give you "points" worth "future rebates". The S.P.A.M. board is full of millions/billions of stranded miles, points and "dollars" from these types of programs that are changed/cancelled on a moment's notice.
<font face="Verdana, Arial, Helvetica, sans-serif" size="2">Originally posted by dgordon: I think ynewman's point is that you are "buying" miles - that's all.</font>
I have heard a similar argument - that a "free" ticket (25K miles) actually costs $25,000 because that's how much was charged to get the ticket.
But these arguments assume you only made the charges to get the miles. In fact, you made the charges to buy groceries, fix the car, etc. - all purchases you would have made even if you didn't have an affinity card.
I think you are only "buying" miles if you would not otherwise have made the charge. You're going to spend money at a restaurant regardless of whether you have an affinity card. The real question is whether you're going to get something back from your purchase - either a cash rebate or a miles "rebate."
The only "buying" I associate with affinity cards is the annual fee because I don't have to pay a fee to get a credit card.
The easiest break-even analysis is to multiply your annual charges by your cents/mile. If that dollar figure exceeds your annual fee, you come out ahead.
