pgary

Because you can always get 2% tax free cash back on a number of credit cards , there is always an opportunity cost to acquisition of miles via credit cards. For mega bonuses, this is usually trivial compared to the value of the miles, unless there is a large spending requirement, where it gets more interesting. For miles for purchases, I consider the cost too high unless I am purchasing in a special category offering more that 1 mile//$1 spent. But this varies on how you would spend the miles. Some examples:

• Up front miles bonuses:
  • As of this writing, the standard Southwest Airlines Rapid Rewards Plus Card offers 40,000 bonus points after you spend $1,000 on purchases in the first 3 months your account is open. Plus earn an additional 20,000 after you spend $12,000 on purchases within your first year of account opening. It has a $69 annual fee, not waived the first year. Spending that $1,000 on a 2% cash back card would net you $20, Spending it on the SWA card nets you 41,000 points (remember the 1 point/$ spent). So those 41,000 points cost you $69 + $20 = $89, meaning 0.2225 cents/point. Probably well worthwhile for anyone who flies SWA. However, the 20,000 +12,000 points received for the additional $12,000 spend cost $240 (2% of $12,000 that would be received on a 2% cash back card). Compare that to the dollar cost of a ticket you would buy from SWA. Be sure to include the value of the flight points you would receive for actually purchasing the tickets. Also compare to the 50,000 points bonus for spending $2,000, if it is still available.
  • As of this writing, the United Airlines personal credit card offers 40,000 Bonus Miles after you spend $2,000 on purchases in the first 3 months from account opening. Plus, an additional 25,000 Bonus Miles is offered after you spend $10,000 total on purchases in the first 6 months from account opening. It has an annual fee $95, waived the first year. So the 42,000 miles costs $40, which is well worth it for anyone who flies on its metal or that of any of it's many partners. But the extra 25,000 + 8,000 = 32,000 miles cost an extra $160 when compared to 2% of the extra $8,000 spend. The decision is much closer here. Compare that to the dollar cost of a ticket you would actually buy from United or its partners. Be sure to include the value of the flight miles you would receive for actually purchasing the tickets.
• Miles for spending:
  • The standard offers give 1 mile or point per $1 spent. This means you would be paying 2 cents for each of those miles or points. For me, that is way too expensive. Others who would pay full price for a business or first class ticket, this might find this to be a good value. In my younger, poorer days I would simply fly cattle cattle class a day early and stay the extra day in a nice hotel to recover from the experience. Now I simply won't do an overnight trip on anything less than a flat bed seat, which I can almost always get for miles, now that I am retired and my time is flexible. But for bonus miles for purchases in special categories, the math gets interesting.
    • Example I have the Chase Ink Business PreferredSM credit card. The initial bonus 100,000 Ultimate Rewards points i received are well well worth the opportunity cost of $100. I convert the points to United Airlines miles, which has the most extensive access to most anywhere in the world on its flights and those of its partners. For purchases, the standard 1 point/$1 is too little for the 2 cents I could receive on my 2% cash back card. But the 3 points/$1 spent in certain categories - 2/3 cent per point - is worthwhile to me. So I restrict my use of it to those types of purchases. Most of those purchases are automatic monthly charges. Easy.
    • Another example: I have the American Express Gold card.At the time I received it, it gave me a very good American ExpressMembership Rewards Points bonus for a small opportunity cost. (Alas, the current offer has a high annual fee, not waived the first year.) It now has special categories for 4X points for purchases. But I use these points only for conversion to Delta Airlines miles. With a few outstanding exceptions (like a recent business class flat bed seat ticket to Hanoi on China Air for 90,000 miles, or the recently frequent last minute miles sales), the Delta miles cost of award tickets are incredibly expensive (usually 200,000 miles or more for what I need). So I usually won't pay much of anything for them. This time I made those types of purchases only to get me to a multiple of 1,000 points, as those points convert to miles in multiples of 1,000. But others with different needs will disagree with me about this. Domestic cattle class ticket users living in a hub city like Atlanta, for example might find the 1/2 cent per mile to be a very good buy. Or perhaps you can transfer the points to miles of one of the many other available airlines that might have lower redemption costs. You have to do the math.

I very much look forward to comments on this article. I am sure the experts will point out errors and ommisions.

Mods: I suggest you make this post a sticky. Then folks can include a link to it within any write-up of a credit card with expensive spend requirements. Thanks. (I will edit out this request after you do this.)

sdsearch

While I agree with your post overall, here you've come to a calculation on which there is less agreement. If I wouldn't go at all unless I can get an award with miles for business class, what is the value of the miles? Is it the highest fare I would actually pay if I could (even though I actually can't)?

This is my case. I choose when to go and where to go based on availability. I only fly "redeye" longhaul overseas in business class. I might consider extra-legroom economy (or premium economy) seats for a non-"redeye" longhaul overseas. I do outright buy (hardly ever do an award) most of my domestic (including "nearby foreign") flights. So the only thing I use miles for is those things I can't afford to pay for (unless I'm trying to "use up" cash-equivalent points at Southwest or Jet Blue, perhaps).

If I can't find business class availability to somewhere overseas that I want to go, I might change that trip to a domestic paid flight (to a much nearer destination) and try again the next time. (I have to request PTO from work far ahead of time, so I can only wait so long before I have to commit to dates.)

I would never pay for a business class seat on most "redeye" itineraries, they're just too expensive for me. But does that make get them with miles have no value?

So aren't the miles worth more than 2 cents then, if I simply wouldn't go overseas (I'd just pick a "fallback" destination domestically instead perhaps) if I didn't have the miles, and I do use them for longhaul business class that costs many $$$$?

Having said that, 1 miles per $ is a very slow way to earn a business class longhaul ticket, even if it's probably somewhat faster than 2% cashback to earn that. So I concentrate my existing-card spending as much as possible to be in categories that earn more (for example, Amex MR points at 4x or Chase UR points at 5x on certain categories).

pgary

Thanks for your thoughtful response.

Long ago I was told about a woman who valued miles at 10 cents each. She was a high powered executive in a very stressful job. When she vacationed, she wanted everything first class. She would actually pay dollars for same if she couldn't get it with miles. And given her income, she probably spent enough on her credit cards to get the miles needed to get first class tickets. And yes, for her, the miles were more valuable than 2 cents each. Different uses for miles produce different valuation. But if you would never actually pay a too high price for first class treatment, I don't see how you are saving that much money by using miles for same. Using those miles does not put the full price in your pocket.

When I use special discounts with my Safeway Club Card, the receipt always tells me how much I saved. I always smile, especially when a checker point out the savings. I tell the checker that that amount is savings over a price I would never pay. I didn't "save" it, because I would never spend it.

guv1976

Credit-card churning is popular among some FTers precisely because of the value of the sign-up bonuses. And with some airline cards (AA and UA) now offering 2X miles on dining purchases, that can change the value equation for some. In addition, the AA card offers a 10% mileage rebate on redemptions (limited to 10,000 rebated miles per calendar year), as well as access to a changing list of reduced-mileage-award destinations. I'm currently in the middle of my second domestic roundtrip this year using AA miles to reduced-mileage-award destinations. Each roundtrip cost me just 17,500 AA miles, before the 10% mileage rebate. And award travel on AA gives me the flexibility to change dates of travel for free, if necessary.

pgary

So the net 15,750 miles cost would have an opportunity cost of $315 at 2% if you received them by credit card purchases at 1 mile/$1, plus the flight miles you would have received had you purchased the flight with dollars. How does that compare to what it would have cost had you purchased it with dollars?

Another thought: Could you have acquired the flights with short distance 7,500 Avios awards? The cost vs. value of Avios is a whole different subject, because of those short distance awards.

guv1976

I primarily churn cards as a way of earning miles, so my opportunity cost was much less: I had to charge $4K to earn a 60K (or maybe it was a 65K?) bonus, in addition to the miles I earned from the charges themselves. So my opportunity cost is much less than $315. And if I only charged dining and gas to my AA card, I would only have to charge $8K to earn 16,000 miles, so the opportunity cost there is only $160 versus a 2% cashback card, plus the miles I would have earned on a cash ticket.

Because I live in a small spoke city on AA's route map, BA Avios don't often provide good value for me, since I'm always traveling beyond AA's PHL hub. But IB Plus Avios can provide very good value indeed on short-distance AA trips that require connections. Have you looked at the IB Plus redemption chart for travel on AA?

guv1976

And there are, of course, cards that earn points that can be redeemed either for cash on certain travel purchases, or transferred to certain frequent-flyer programs, so that the cardholder gets to decide in each instance which is more advantageous.

ramolnar

I wouldn't call myself an expert, but I believe your computations are wrong for the second bonus. Assuming someone spent the first $2,000, an additional $8,000 would be needed to reach the second bonus. That $8,000 in spending would earn 8000 + 25000 = 33000 miles, at a marginal cash-back equivalent cost of $160. 0.5 cents per mile is a better value than 0.8 cents per mile.

mia

1 mile per dollar is no longer a meaningful baseline. 1.5 is the absolute minimum, and this reduces the opportunity cost to $0.0133 per point -and- 2 miles per dollar is widely possible, with an opportunity cost of only $0.01.

pgary

I stand corrected. I missed the word "total". I will edit my original post to fix this. I would like it to be a reference sticky to which flyertalkers link while discussing specific credit cards with high spend requirements for bonuses. So I would like it to be perfect..

Thanks.

pgary

Except for a few special categories (always including a purchase from the airline), American, United, Delta, Alaska, and Hawaiian offer 1 mile/$1 purchase on their cards. So I don't understand. Please explain.

fliesdelta

AA's Citibank MC earns 2x on restaurant and gas purchases, those would be an example of special categories that don't require airline purchases.

mia

American Express, Chase and Citi issue cards which earn points that are convertible to miles. American Express offers a card that earn 2 points (and therefore two miles) per dollar on all spending. Chase offers two cards that earn 1.5 points (and therefore 1.5 miles) on all spending.

Also, the Bank of America Virgin Atlantic MasterCard earn 1.5 miles per dollar on all spending, with an annual threshold bonus which raises the earning to 2+ miles per dollar. The Chase United Club card earns 1.5 miles per dollar on all spending.

EmailKid

Sure, but unless unles you were planning on a United Club membership, that is a whopper of an annual fee

akr1970akr

I think one would have to make the slight adjustment for the surcharge Amex imposes for MR transfers to domestic FF programs as well. That's a slight slippage in value.

I've been very surprised, but I've been getting some decent value AA Y domestic redemption's the last 3 times I've used them. (between reduced mileage awards, 10% off, and sAAver redemption's to expensive small towns) And it seems like their reduced mileage web specials can flare up for those opportunistic enough -- although our situation makes it extremely unlikely we could truly use those.

So ever so slightly I'm putting some bonused spend on my AA Plat MC because of that. And using their AA shopping portal occasionally. Not willing to keep a big stash of AA anymore, but maybe enough for 1 or 2 small redemption's.