Thursday, January 9, 2014

Cashback vs. Points/Miles - What's Better?


What's better, cashback or points/miles?  It seems like I am asked this question at least once a month. 

Over 2 years ago, I wrote a post that came out heavily in favor of cashback.  You will hopefully be able to tell after this post that my views are slightly more nuanced than before.

So, what's better?  My conclusion is that there is no actual answer.  In most situations, I prefer cashback.  To me, the more important question is: What are the benefits of each and how should one decide which type of rewards to collect?

Here is a quick list of factors that are important in your decision.  After the list, I will discuss them in more detail.  I'm sorry for the atypical length of the post, but I think this is important stuff and tough to shorten.

1) Travel Habits
2) Value of a point/mile
3) Last Minute Travel 
4) Luxury Travel
5) Getting something for free
6) Earning miles for your trip
7) Devaluations
8) Spending Flexibility
9) Credit Card Sign up Bonuses
10) Penfed American Express

1) Travel Habits

This is the probably the most important factor.  Do you travel a lot?  Do you have a job? How flexible are you?

I have plenty of miles.  I have over 300,000 united miles, 200,000 American Airlines, 75,000 Avios.  I got 75% of those within the last year.  The "problem" for me is that I have a job.  I can't just pick up and go when the value of miles are high.  I didn't have time this year to go on vacation and spend those miles.

When it comes to miles, flexibility is key.  If you aren't an expert award searcher, you may not find the flights that work well for your job/situation.  Blackout dates are common.  If the flight you need is blacked out, what good are all of those miles?  If you are flexible for travel, miles are perfect.

2) Value of a Point/Mile

How does one go about valuing point or mile currencies?  Unless you are selling them, which is against the terms and conditions of the Frequent Flyer Program you agreed to when you signed up - everyone makes their own decisions - it is quite difficult to assign a set value. 

I think it is fair to use the value of what someone is willing to pay for those miles, but in our situation we are talking about someone who is going to use the miles so the broker values aren't true for you.  If you redeem them on one flight you might get 6 cents of value, but another flight might only be 1.5 cents. 

The value depends on how they end up being used and you don't know the answer to that until you actually use them.

You can assign a lowest level.  For example, I know that if I am redeeming miles there is no way I will redeem for less than a penny per point.  Therefore, when I am trying to figure out if I should get 3 miles per dollar spent or 2% cashback, I will choose the miles.  If I will get 4%, I will choose the cashback.

3) Last Minute Travel

Last minute travel is one time where miles are sitting pretty.  If you are buying a ticket to Israel tomorrow, you might have to spend $2,500 to get that ticket, but the price of miles stays the same.  In fact, some of the best availability for miles redemption is last minute.  It's great to have miles available for last minute travel.

4) Luxury Travel

Economy travel isn't usually terribly rewarding when you are paying with miles.  You can check out the end of the post for some math.  For luxury travel, however, miles become a much better deal.

If you normally stay in 5 star hotels and fly in business/first class or you want to be able to, miles are the way to go.

Personally, I can't bring myself to do it.  Even if I can get better value for each individual point, you are still paying more.  Again, check out the math at the end.

In summary, it depends on your priorities.  If you want to fly luxuriously and you are willing to pay a premium, miles give you much more value.  If you don't care like me, stick to cashback earning.

5) The Feeling of Free

"When I use miles, I am traveling for free!"  This is patently false, but I understand it.  Once you have earned the miles you are in fact traveling with minimal out of pocket expenses. However, there is an opportunity cost in attaining those miles.  You could have been getting cashback, which you have forfeited in favor of miles.

That being said, I understand it.  If it feels free to you, it doesn't matter what I think.

Personally, I set up a separate account where all of my cashback goes to.  This is my travel account.  If I redeem $30 from my Bank of America card, it gets transferred to my travel account.

6) Earning Miles for Your Trip

When you travel with miles, an important factor to remember is that you don't earn miles because it has been paid for by miles.  When you pay with cash, you do earn miles (the old school way of earning miles).

This is not an insignificant factor to me.  I flew to Israel on Turkish Air via Istambul and earned over 11,000 frequent flyer miles into my United account (both are Star Alliance partners).  The whole trip is only 80,000 miles on United, which means that basically every 8th trip is free when you pay with cash.  To me, that means that cashback is actually 1/8 (12.5%) cheaper than the listed price for airlines.  I just saved $125 on a $1,000 flight. Boom!

7) Devaluations

Airlines and Hotels have and will continue to devalue their miles in the future.  This year, United majorly devalued their currency for luxury travel starting in February and lots of Hotel chains devalued their currencies before that.  This is up to the discretion of the airlines. It isn't that frequent (can't decide if the pun was intended), but it does happen.

8) Spending Flexibility

I can spend money on whatever I need or want, including flights.  Miles are limited.  This comes with the psychological benefit of getting something for free.  It wouldn't feel free if it could be used for anything, ironically it's only free if you have to use it for specific things. 

9) Credit Card Sign Up Bonuses

In my mind, this is where miles programs are undeniably better and this is where I get the majority of my miles.  Between Chase, American Express and Citibank, the best sign up bonuses are all for miles or points that can be converted into miles at a higher rate than can be redeemed for cashback.

10) PenFed American Express

If you use miles, you are losing out on the PenFed American Express card which offers 5% cashback on travel expenses with no annual fee.  Combine this with the 12.5% from earning miles and the cash price just went down by 17.5% for economy travel.  Double Boom!

Bottom Line:  I try to have a mixture of both cashback and miles.  I certainly will go after airline credit card sign up bonuses.  I also will value miles at 1 cent per mile for every type of mile.  Certainly oversimplified, but easier for me.  I know I can redeem my points for more than 1 cent a mile and it makes the decision of what to collect more simple when it comes to shopping portals.

In addition, if you are interested in miles, you should check out and for lots of great information regarding the best ways to earn and take advantage of miles.  Often times you need to be a real expert to get the best redemption options or at least follow one on a blog :) 

Some Basic Math

I don't personally plan on doing much travel that isn't to Israel and I assume many of readers are similar.  Therefore, I like to show some basic math of miles to Israel.

AmericanExpress Starwoods is generally considered the best credit card for everyday spending to earn miles.  This is because you can redeem 20,000 starpoints for 25,000 miles on many airlines.  Instead of 1 point per dollar spent, you are really earning 1.25 miles.

The easiest Starwoods partner for Israel is probably American Airlines, which requires 90,000 miles to fly to Israel in Economy.  You need to spend $72,000 to get 90,000 miles at 1.25 miles per dollar.  If you spend $72,000 on a 2% card like Fidelity American Express you would end up with $1,440.  The vast majority of the time an economy ticket to Israel is less than $1,440.  As I pointed out, the cashback price is really 12.5-17.5% lower than that as well.  Also keep in mind that there is a $65 annual fee with Starwoods and no annual fee for Fidelity American Express 2% cashback on everything.

This being said, there are definitely ways to make the math work better in favor of miles.

An Economy class trip to Israel is 80,000 miles on United (going up to 85,000 in February). A Business class trip to Israel is 120,000 miles on United.  Therefore, it is only 1.5x more expensive for business class in miles.  Let's say Economy costs $1,300 and Business class costs $3,000, that's more than 2x the price. 

If you use 80,000 miles to pay for the $1,300 Economy seat you are getting a value of 1.625 cents per mile.  If you use 120,000 miles to pay for the $3,000 Business ticket you are getting a value of 2.5 cents per mile which is better than the standard 2% credit card.  Still, I wouldn't ever pay $3,500 for a business class ticket so it is a fake 2.5% to me.  If I spent $120,000 on a credit card I would rather take my $2,400 and fly almost twice in economy rather than "get a good deal in Business." 

These are my rambling thoughts on cashback vs. miles.  I would love to hear any comments or rebuttals.  Who knows maybe someone can turn me into a miles-man!