ynewman

Hi,

I wanted to mention what I think is the real cost of obtaining airline miles via spending on affinity credit card. Obviously, there's the annual fee of the credit card (IIRC, $50 for citibank AAdvantage and $60 for First USA United Mileage Plus). But there's also the alternative cost, since you could have used a cashback credit card for that purchase instead. For example, Farm Bureau Bank offers a CC that rebates 2% of your purchases (capped at 60K points per year; 35,000 points are equivalent terms, to $700). Other issuers offer cards at 1.5% or 1% rebate levels. Since this is a rebate, it is tax-exempt (but I'm not your tax advisor).

Personally, I use both mileage-earning and cash back credit cards. I buy saving bonds, thus "spreading the wealth" around to maximize my utility.

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.

Obviously, you say, why does mileage-earning spending have to replace cashback-earning spending? Because the bulk of my spending comes from saving bonds, are the annual purchasing limit there is $45K.

I'd like to clarify. My "logic" is not that cashback cards are better than affinity cards, or vice versa. My point is only to argue that affinity spending-based miles are NOT free - there's an opportunity cost attached. Moreover, the opportunity cost differs; People who use the miles for domestic flights have different opportunity costs than people who upgrade international Y to C or F.

I'd appreciate comments/other view points.

[This message has been edited by ynewman (edited 08-01-2002).]

[This message has been edited by ynewman (edited 08-01-2002).]

tom911

Really depends what you use the miles for. 60K will buy an Australia ticket in coach on UA, and those are generally $1,000 or more (or will make a good dent in the 90K needed for business class). If you were strictly a domestic flyer, you could buy two coast-to-coast tickets on a good sale for $200, and then your rationale would work. If, however, you don't fly to one of those airports with cheap fares, you could even justify stacking the miles.

It's going to come down to where you spend the miles. Each of us attaches a different value to them depending what routes they'll be used on. What works for me may not work for someone else (most of mine go to international tickets in business class).

ynewman

I didn't say that it's not worth it; all I said is that it's not free.

yorock

I follow your math, but not everyone has the same opportunity costs as you. I have a Citibank card that only gives me 1% cashback (credited the next month) but I can only use it online - it does not have a magnetic strip.

When I got to Home Depot to make a big purchase I have to choose between double miles from my Skymiles AmEx or using my Home Depot card which features no payments/no interest for 6 months on purchases over $299. I can then park the amount of the purchase in an interest bearing account and pocket the interest a few months later or I have the luxury of waiting to come up with the cash.

I guess my point is that each bird sings it's own tune. It's up to the individual to determine whether or not an affinity card is right for them.

Tino

No, it doesn't. I just checked with them, because I would apply in a minute if it was true. It is a "sliding scale" that eventually goes up to 2%. If you charge $60,000 per year your average rebate will be considerably less than 2%.

I once had a flat 2% Visa card from Ameritech, but they phased it out in 1996, and haven't seen one since.

ynewman

It definitely does. They do have a sliding scale, and you must redeem 35K points to get 2%. You can only earn 60K annually. But there's nothing to stop you from earning 60K this year, redeeming 35K for $700 (you now have 25K points left). Next January you can again charge 10K and redeem another 35K for $700, and so on.

Their points do not expire for three years, and the annual limit is based on calendar years. So if you charge enough (thank you, savingbonds.gov) you can redeem in increments of 35K and get exactly 2% (not up to 2%) on all your purchases.

Hope that helps.




[This message has been edited by ynewman (edited 08-01-2002).]

jack123

The mamimum on I Bonds is $30K/yr. If you are married you can do $30k on each SS#. JG

ynewman

And the maximun on EE-bonds is $15K. That's $45K together. $90K if you're married.

Randy Petersen

I can't agree with the logic here since parking cash for two months in any kind of account is pretty low earning since your speanding is actually spread out over the two months, not all at once. As for charging against the 2% cashback - not sure why you'd do that since the miles have their own value. In your scenario, 66K is two coach tockets to Hawaii on Delta at some $500-$650 apiece, depending on if you live in a hub city or not. That is let's say an average rebate of some $1,100 from the credit card alone, meaning your total rebate from your $28k spend is about 4% - twice what your cashback card can give you. Let's say you use your 66k miles for an upgrade from coach to biz to Europe, the difference there is some $4,000 of card rebate benefit (difference between coach and biz), meaning your rebate from an affinity credit card is now over 14%. I've never been a fan of cash back since it always has only one value - i'll always choose an affinity credit card and yes like the rest of you have really stepped up my spending with this double miles thing with Delta and United. I'm sure to spend $100 during the same period and that's 200,000 miles versus $2K (cashback card).......got to be miles

ronin

Airline miles on affinity cards are not taxed. Is "Cashback" subject to taxation? If so, it's not exactly cash back, and its value is diminished by the tax margin.

ynewman

As I said, cashback is defined as "rebate", and thus is not taxed (but I'm not your tax professional...).

ynewman

Randy:

I'd like to clarify. My "logic" is not that cashback cards are better than affinity cards, or vice versa. My point is only to argue that affinity spending-based miles are NOT free - there's an opportunity cost attached. Moreover, as was pointed out previously, the opportunity cost differs; People who use the miles for domestic flights have different opportunity costs than people who upgrade international Y to C or F.

[This message has been edited by ynewman (edited 08-01-2002).]

cactuspete

Your analysis of affinity cards ignores another valuable aspect - - the miles/points earned makes all of your other miles/points earned from other sources (travel, bonuses, partners, etc.) even more valuable. And affinity cards also run double miles and other promos.

Also, I am able to use my miles/points in such a manner as to earn far greater than a 2% return.

j379pa

To further muddy the waters--yes, my AMEX Delta card has an annual fee, but I plan to follow Randy's advice and switch it to a Starwood when my annual fee comes up. Same benefits, less annual fee. Another bonus is being able to use it for business expenses, increasing my chances of obtaining my RTW goal! Finally, it offers a level of insurance with car rentals that more than pays for itself each year.

And, some cards carry no annual fee. I have cards for Hilton, United, & Northwest that carry no fee.

A hidden cost that has not been mentioned is the 3-5% charge that cards charge back to companies when products are purchased. This expense is passed on to the consumer. That means that everything we purchase costs at least this much more because some people (like me) use credit cards.

JP

Standby4321

I'm with Cactus Pete on this one. The return is far greater than the basic 2%. This has been a good year for promos and mine has produced 6% as a result. It also greatly increases the potential utility of other miles earned.