Value of Frequent Flyer Miles Reconsidered

Discussion in 'General Discussion | Miles/Points' started by AJTrenkle, Jan 19, 2013.  |  Print Topic

  1. AJTrenkle

    AJTrenkle Active Member

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    I went through a mental exercise today of whether or not I should redeem my UR points for cash back or transfer them to an airline program for travel. After running the numbers, and assuming I don't value a premium cabin, I actually came out (to my surprise) with the conclusion that the cash back was a better deal.

    What do you guys think?

    I published the full analysis at my blog here. Full text is also below:
    >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
    One of the reasons I even write this blog is because of the inspiration I received, beginning in 2011, from reading various travel blogs. Over the past year or so I have accumulated a somewhat large cache of frequent flyer miles which I have detailed here. This weekend I began thinking in particular about my Ultimate Rewards points balance, and while swimming laps at the YMCA I had the following thought come into my head:
    Should I just redeem these points for cash back? Since I have 120,000 points this would equal out to about $1,200.
    But I then went to reconsider because I know how valuable these points can be for travel. I wanted to see exactly which side would be best by running the numbers.
    So I went through the following little exercise and made the following assumptions.
    • A) I would really only want to travel with my wife
    • B) I do not place any value on business class or first class seats
    • C) I typically can only travel during the summer, Christmas season, or Spring Break time; since I am a teacher. This makes it difficult to redeem awards during “off peak” times.
    • D) I value the miles at a conservative $.01 each.
    • E) The flight I was looking at was Chicago (ORD) to Paris (CDG), I found this on ITA Matrix for $1186.
    Save UR points for travel redemption

    Ticket A on United 55000
    Ticket B on United 55000
    Opportunity Cost Ticket A 9304
    Opportunity Cost Ticket B 9304

    Total Cost In Miles 128608
    Miles Value @.01 TOTAL COST 1286.08

    Redeem UR Points for Cash

    Cost for Ticket A 1186
    Cost for Ticket B 1186
    Cash Back Credit -1200
    Miles earned at .01 Credit -186.08
    Miles earned on credit card at .0214 Credit -50.7608

    Total Cost 935.1592

    I think this spreadsheet makes a lot of sense, and as you can see the total cost is greater if I redeem my award miles for travel by transferring them to an airline partner.
    Why is this the case? Well first let’s look at the “Save UR points for travel redemption side”. Obviously first is the cost of the award in miles itself with two awards at 55,000 x2 for each ticket. If award miles do have a value (in this case I valued them at $.01), then they should show up on the cost side at the top, because in redeeming an award I am costing myself the opportunity to get 9304 miles for each traveler. This is what would have been credited to my account had I actually flown the flight on a paid fare. Then we have to just value the points in some fashion, and I have chosen a conservative $.01 per point. Doing it this way actually makes the case for redeeming as an award closer than it would otherwise, for if points are really valuable the opportunity cost of using the award points and not getting miles for travel would only increase. The cost then is $1286.00
    Now let’s look at the other side of the ledger. The miles I have earned by flying then go down as credit (in this spreadsheet a negative number) on the “Redeem UR points for cash” side of things as I will earn those when I just go out and buy the fare. Also showing as a credit on this side of the ledger are the points that I have redeemed for cash back purposes, both the original 120,000 points plus the cash back I will get from booking the fare on my credit card (I have a .0214 multiplier here as the Chase Sapphire Preferred card gives 2% cash back on travel and 7% yearly dividend bring the total to 2.14%). The total cost of my trip is now $935.
    This of course ignores the fact that I could perhaps also earn interest on the cash in the form of a cash back award for some period of time, but I am leaving that out and just looking at this as a binary choice at a set moment in time.
    The lesson to draw from this, I think, is that credit card award programs may not be quite the deal we think when we are transferring them to airline partners. If we agree with the notion that miles do have some kind of value, we cannot ignore the fact that we may pass up earning valuable miles by traveling on an award ticket. Another lesson, I think, is that the best way to really get a deal on airline miles is by actually flying in the program and then earning miles the old fashioned way. The “best deal” would come from scrounging for flights that are good deals and earn a lot of miles, and then redeeming those earned miles for expensive flights.
    This of course explains the logic from the airline’s perspective in that it really does reward their customers who actually fly.
    This dynamic, of course, would change dramatically if one truly does value premium cabin travel like business or first class. This would tip the costs much more towards the “redeeming UR points for travel” side of the ledger. On the other hand, though, we must remember that each time we place a greater emphasis on the value of the miles themselves (conceivably because we can redeem them for expensive tickets and therefore they are worth $.03 or even $.05 a mile), then the opportunity cost of not earning miles on the distance traveled goes up as well.
    I fully realize I may not be saying anything revolutionary here, but nonetheless I thought this was an interesting intellectual exercise and the information may also be of value to many who approach travel with the same assumptions that I do.
     
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  2. LAM

    LAM Silver Member

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    I read your blog and see your point. But I look at things differently. I am saving my UR reports for two economy tickets to Asia, which would be $1100-1400 each, sometime in the future. I would not be able to afford the vacation if I had to pay cash for those two tickets. I look at miles/points as a way to travel or travel more. I understand there is an opportunity cost to use them that way. But if I took the cash vs the miles/points I would only have probably enough cash for one ticket so the vacation would not happen. Also miles/points can help me travel longer. My next trip will be Germay/Czech Republic in February next year. If I did not have US Air miles and points for most of the hotels I would probably only be able to afford to stay 7 nights instead of 13-14 nights.

    Not saying your thoughts are wrong they just may not be for everyone
     
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  3. arkleseizure
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    arkleseizure Silver Member

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    I think the analysis is pretty flawed.

    If you book with UR, it costs 110,000 total miles, which equates to $1,100 in cash. So you would prefer this option if the cash option cost a net of >$1,100.

    The cash option tickets cost $1,186 each, for a total of $2,372. You claim a total value earned in miles (from both the airline and the Sapphire card) of ~$237. So your net cost is $2,135. This is substantially more than the $1,100 you would gain from converting the UR points to cash. In fact the "Total Cost" you have labelled for the Redeem UR Points for Cash option is the incremental cost of converting the UR points to cash and booking the tickets with cash. As that number is greater than $0, it is a worse option, financially.

    You have the opportunity cost double counted in your initial analysis. You cannot include the miles NOT earned by using UR and the miles you DO earn if you pay cash in a fair analysis of the two.

    In addition, you have given yourself a cashback credit of $1,200 in the cash option, when only 110,000 points ($1,100) are needed to book the flights using UR.
     
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  4. desamo

    desamo Gold Member

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    I think you lack aspiration.
     
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  5. mattsteg
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    mattsteg Gold Member

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    If you have the flexibility in budget as well as a desire to go to destinations that are not relatively cheap, there's opportunity for the points to do much better.

    Even throwing out premium travel, there are lots of tickets priced disproportionately high relative to their point cost. Whether that means short-notice domestic flights, expensive short-haul flights that are cheap with avios, flights to far-flung, obscure destinations,complex itineraries, or something else the key strength is fixed pricing per route that you can leverage over cash pricing when appropriate.

    Of course if this is your dream trip and only obtainable via points a lot of this goes out the window, and do what makes sense within the trip context. The points ticket would have additional flexibility to add a destination, tack on an extra one-way, etc at the end for no additional coat, though, which may still tilt the balance.
     
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  6. DLroads
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    DLroads Gold Member

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    I read the blog, but I have to note something about the practice- I just don't feel comfortable with the practice of 'transferring' traffic from one site to the other. I know that there are many blogs out there, and the content is even worthy, but-it does not feel right.
     
  7. jaw_24
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    jaw_24 Silver Member

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    There are definitely cases where either could be true, even with economy travel. You cannot make a blanket claim based on a single case, as mentioned already. Booking award tickets can give more opportunity to do a trip of your dreams - location, flight, carrier, equipment, route, stopover(s), etc., where paying for a ticket limits you to the cheapest options available, but can give you a good value if you aren't picky about where to go.

    Example 1: This spring, I booked my family of 5 on a round the world (round-trip Asia via Europe) tour to Germany and Beijing flying Lufthansa A380, Air China 777-300, and United 787 (crossing fingers). Flying to 2 continents on 3 different flagships around the world is cheap at 65k miles compared to cash.

    Example 2: Last year, we flew to Italy for $600 pp. At 60k, these miles would have been less that $0.01/mile, not a good option.

    The scenarios are endless. However, with example 1, you must save up to a specific threshold, and using points to pay for example 2 flights makes this saving a bit harder.
     
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  8. Steven Schwartz
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    Steven Schwartz Gold Member

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    Here's a newsflash - everyone is right! For someone who managed to save 60,000 miles and they are strapped because of other obligations, it might mean a trip they would otherwise not be able to have taken. I really don't believe any of us would tell them they were crazy - only Bon Voyage!
     
  9. I just bought a $2555 ticket to Asia from Canada and my visa card refunded $2K of that fare for 100,000 points. I get over 18,500 status miles on AC plus double tier bonus for a total of over 37,000 miles. That is almost 20% of the miles needed for super elite, and my upgrades cleared on the AC metal flights. The visa card gives me 1 point per dollar spent. I would suggest that is better than any cash rebate.;)
     
  10. Wandering Aramean
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    Wandering Aramean Gold Member

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    You got $2000 back for $100,000 in spend. That's a 2% return, though you MUST redeem that on travel rather than 2% anywhere, something that other CCs offer. If you're going for a cash-back type of card there are other, more fungible options available.

    To the OP's point (though I didn't bother clicking out to read the other post because I'm not so inclined) the best value is what works for you. Personally I have both cash-back and points-earning cards. I use the appropriate one in the appropriate situation. Both have value. There is no one always best option for everyone.

    And you don't have to be redeeming for long-haul premium cabin to be getting great value from points. I've had a few coach flights which were quite valuable to me, both in the abstract and in terms of the relative CPM rates of the award versus the list price of the ticket.
     
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  11. jbcarioca
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    jbcarioca Gold Member

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    There it is. As usual you get it right. YMMV. Some of that is pure preference, not based on rational economics at all. I have both, but I also am not rationally optimized.

    In a former life I designed these products. One of my favorites was a design we made taht is wildly popular, but actually has slightly less than zero economic value and carries a hefty annual fee. We made this card invitation only based on spending history. Almost everyone offered it accepts. Among those who did was a colleague who participated in the design and knew there was no rational payback. He knowingly took a ripoff in order to have the purported status of the card. He's really intelligent too.

    I would not do what my colleague did, but I have done a good many things equally non-rational. It seems to me we should accept such decisions when we make them rather than try to justify them as a superior deal.

    On a purely rational basis the best deals are almost always associated with cash back, and Discover frequently offers the winner. Ain't no status in Discover! Further cash back is cheaper for the card issuer to administer than are the more exotic points programs, so the ROI calculations for the issuer inevitably have the extra overhead built in. Where the big points programs win rationally, they almost always do it with reduced acquisition costs. The active churners have fairly well destroyed acquisition cost advantages so more restrictions are emerging.

    So, YMMV and enjoy your choices. I do that, no matter how silly they are.

    My own idiocy should be admitted. I signed up for the grotesquely expensive Citi AAdvantage ultra ppobah card with the equally grotesque annual fee last year. I justified that because I could still get these guys. What use are they? None at all, other than bragging rights here, which only work if Horseguy and others with more digits are not around. I'm happy with the ridiculous choice. So should we all be.

    Million Milers Balance**


    8,535,413

     
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  12. The value was in fact much greater than 2% to me because of the status miles received for the flight. In summary the flight cost me $555 and I will receive over 37,000 aeroplan miles of which 18,500 are toward renewal of super elite status. My AC flights have both been upgraded. That, my friend is value for a FF'er and no cash rebate could offset that in this case. There are numerous blogs out that detail the values of individual credit cards and in my view I've seen very few, if any, that match travel rewards if used properly. I speak for Canadian CC's only here. My annual CC spend is enough to make me watch these things closely although I now wonder why I've kept my AMEX platinum card although AMEX Canada is trying to boost the value concept in many other ways to offset the higher fees charged. For instance I now get free valet parking at my local airport and a 15% discount for parking. At $30 a day that starts to add up. 30 trips a year @ a 3 day average is equal to a discount of about $135. A different kind of value but value added none the less.
     
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  13. arkleseizure
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    arkleseizure Silver Member

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    While I agree with you (and the general one size doesn't fit all sentiment), I think its hilarious that the discussion of this point continues as the OP's point was founded on bad logic or math. Besides, the topic of the OP's blog post was pay for flight with accumulated points vs redeem points for cash and book the flight with cash. Within the limited scope he is discussing, you can establish value and a right answer...its just that he did it wrong.
     
  14. AJTrenkle

    AJTrenkle Active Member

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    @arkleseizure.. I fully admit that I wrote the article relatively quickly, so you may have found a number off and for that I apologize it was not designed to be dishonest. I could have been mentally confused by the 110k miles I was talking about on the "transfering to an airline partner side" vs the 120 I have in the UR account balance. Also, you may be right on my double accounting of the opportunity cost, I frankly don't know how this might be done as best practice in an accounting profession, but the point I was trying to express in numbers is what guinnessxyz expresses in his experience: that we do get a substantial rebate in miles and credit card points if we just buy the tickets outright. That rebate is a benefit if we do buy the tickets and their absence is a cost if we don't. If we do assign value to miles/points (as I do) we must remember then that this rebate is of significant value. Just trying to express that here.

    I am not even sure if I agree with my own conclusions, it was just interesting how the thought experiment came out in the end. I guess one other question might be: if someone came up to you on the street and offered you $1200 plus 18,600 miles; would you take that offer, or would you take 120,000 miles?

    Also my intent was not to hijack traffic from here to my site so I will copy the article below as well and edit it in the original post.

    >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
    One of the reasons I even write this blog is because of the inspiration I received, beginning in 2011, from reading various travel blogs. Over the past year or so I have accumulated a somewhat large cache of frequent flyer miles which I have detailed here. This weekend I began thinking in particular about my Ultimate Rewards points balance, and while swimming laps at the YMCA I had the following thought come into my head:
    Should I just redeem these points for cash back? Since I have 120,000 points this would equal out to about $1,200.
    But I then went to reconsider because I know how valuable these points can be for travel. I wanted to see exactly which side would be best by running the numbers.
    So I went through the following little exercise and made the following assumptions.
    • A) I would really only want to travel with my wife
    • B) I do not place any value on business class or first class seats
    • C) I typically can only travel during the summer, Christmas season, or Spring Break time; since I am a teacher. This makes it difficult to redeem awards during “off peak” times.
    • D) I value the miles at a conservative $.01 each.
    • E) The flight I was looking at was Chicago (ORD) to Paris (CDG), I found this on ITA Matrix for $1186.
    Save UR points for travel redemption

    Ticket A on United 55000
    Ticket B on United 55000
    Opportunity Cost Ticket A 9304
    Opportunity Cost Ticket B 9304

    Total Cost In Miles 128608
    Miles Value @.01 TOTAL COST 1286.08

    Redeem UR Points for Cash

    Cost for Ticket A 1186
    Cost for Ticket B 1186
    Cash Back Credit -1200
    Miles earned at .01 Credit -186.08
    Miles earned on credit card at .0214 Credit -50.7608

    Total Cost 935.1592

    I think this spreadsheet makes a lot of sense, and as you can see the total cost is greater if I redeem my award miles for travel by transferring them to an airline partner.
    Why is this the case? Well first let’s look at the “Save UR points for travel redemption side”. Obviously first is the cost of the award in miles itself with two awards at 55,000 x2 for each ticket. If award miles do have a value (in this case I valued them at $.01), then they should show up on the cost side at the top, because in redeeming an award I am costing myself the opportunity to get 9304 miles for each traveler. This is what would have been credited to my account had I actually flown the flight on a paid fare. Then we have to just value the points in some fashion, and I have chosen a conservative $.01 per point. Doing it this way actually makes the case for redeeming as an award closer than it would otherwise, for if points are really valuable the opportunity cost of using the award points and not getting miles for travel would only increase. The cost then is $1286.00
    Now let’s look at the other side of the ledger. The miles I have earned by flying then go down as credit (in this spreadsheet a negative number) on the “Redeem UR points for cash” side of things as I will earn those when I just go out and buy the fare. Also showing as a credit on this side of the ledger are the points that I have redeemed for cash back purposes, both the original 120,000 points plus the cash back I will get from booking the fare on my credit card (I have a .0214 multiplier here as the Chase Sapphire Preferred card gives 2% cash back on travel and 7% yearly dividend bring the total to 2.14%). The total cost of my trip is now $935.
    This of course ignores the fact that I could perhaps also earn interest on the cash in the form of a cash back award for some period of time, but I am leaving that out and just looking at this as a binary choice at a set moment in time.
    The lesson to draw from this, I think, is that credit card award programs may not be quite the deal we think when we are transferring them to airline partners. If we agree with the notion that miles do have some kind of value, we cannot ignore the fact that we may pass up earning valuable miles by traveling on an award ticket. Another lesson, I think, is that the best way to really get a deal on airline miles is by actually flying in the program and then earning miles the old fashioned way. The “best deal” would come from scrounging for flights that are good deals and earn a lot of miles, and then redeeming those earned miles for expensive flights.
    This of course explains the logic from the airline’s perspective in that it really does reward their customers who actually fly.
    This dynamic, of course, would change dramatically if one truly does value premium cabin travel like business or first class. This would tip the costs much more towards the “redeeming UR points for travel” side of the ledger. On the other hand, though, we must remember that each time we place a greater emphasis on the value of the miles themselves (conceivably because we can redeem them for expensive tickets and therefore they are worth $.03 or even $.05 a mile), then the opportunity cost of not earning miles on the distance traveled goes up as well.
    I fully realize I may not be saying anything revolutionary here, but nonetheless I thought this was an interesting intellectual exercise and the information may also be of value to many who approach travel with the same assumptions that I do.
     
  15. JetsettingEric
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    JetsettingEric Silver Member

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    My thought is that you have the wrong credit card. UR points have tons of potential, but you're simply not using them correctly. Most here would value UR points at more than 1 cent per point and find better uses for them.

    Based on what fits you the best, this is what I would recommend. A Citi Forward card, which earns 5x thank you points at restaurants (all types), bookstores (including amazon), entertainment, plus 1 point on everthing else. You get cell phone insurance if you charge your cell phone bill here. Then, get a Citi Premier card, that allows each thank you point to be used for $1.33 cents for travel. It comes with an $125 annual fee, but you get a domestic companion ticket and a 25,000 point bonus after spending $2k in 3 months. Better offers have been given so you earn with your Forward card and then opportunistically apply for the Premier card when you're ready to redeem.

    For coach class redemption, my favorite redemption is a last minute trip. Someone needs to get somewhere for a funeral, miles to the rescue. Last minute ski trip because of a storm, let's use miles to get to EGE. A last minute business or networking trip, miles to the rescue. For advanced purchase decent fares.. yeah, miles are a pretty bad redemption. But there are cases where it's really awesome.
     
  16. I think you have just been on a vertical learning curve from more experienced FF'ers and that's a good thing. Don't apologize for asking a question or putting a thought out there. It's how you learn besides from reading more here..
     
  17. arkleseizure
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    arkleseizure Silver Member

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    I started a conversation with you on the analysis, but to be clear this is not the right question to be asked in this situation. I think your overall thought process is going in the right direction; the analysis should not be as simple as cost of flight booked vs number of points, as there are other factors (miles the flight earns you if booked via cash, etc.) that come into play.
     
  18. murakami

    murakami Silver Member

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    The big difference for me with a cash redemption and a miles redemption is that on the cash side, I am likely to go with the cheapest flights which are not always the most direct or time friendly. Using miles often lets me choose specific segments to cut out unnecessary layovers or inconvenient departure/arrival times that otherwise would have been too expensive to purchase with cash.
     
  19. Dad to GO

    Dad to GO Silver Member

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    Should I bring up the question about cash back vs. using UR's for hotel redemption? I'm sure that will start a whole new discussion :p
     
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  20. jaw_24
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    jaw_24 Silver Member

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    Just transfer UR to Southwest RR points - guaranteed $0.0167/pt value! As a bonus, the trip is fully refundable, although only back to RR points.
     
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  21. Boraxo

    Boraxo Silver Member

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    Great analysis. I sometimes wonder if I would be better off taking cash as I have huge mileage and hotel point balances that I can't seem to use (to be fair most of these were earned thru BIS flying, hotel stays or bonuses). And they are depreciating every year as programs adjust their requirements.

    However there is always the occasional redemption that makes the points appear to be a better deal. For example I was able to redeem 140k UA miles for 4 economy tix to Cancun in late December. Using the example above I could have received $2338 if those points had been earned using a Chase card. But the actual value was at least 2x higher as I never saw RT fares below $1000pp. (In this case the miles were earned by flying, so I got $4000 in free travel from half my prior years travel on UA, including bonuses - not bad!)

    The bulk of our CC spend currently goes to 4 cards: Chase BA, SPG Amex, Chase Marriott and Chase WN. And not surprisingly these are the 4 programs where we redeem most frequently. For the first 2 I generally do better than .02 per point on redemption (and BA earns miles at 1.25 per $) so that beats a 2% cashback card. The Chase WN is a special case because we use that card for all auto-payments after having 3 cards randomly compromised last year (it's a hassle to change all your auto-payments). But I should probably reconsider the Marriott spend...
     
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  22. mattsteg
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    mattsteg Gold Member

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    Not to dig up a dead subthread, but if the cost of the ticket was 2 cents per point, you didn't really receive "much greater value" - you could have purchased that same ticket with the proceeds from a 2% cash back card. It's ridiculous to say that "no cash rebate could offset" the cost of a ticket that's not all that expensive. I don't know the canadian market and it's certainly possible that there isn't a card that would net you 2% with your spending patterns, but that's a point that you haven't elected to make.

    Regardless of how highly you value your ticket (i.e. what you would pay for it if you had to), it's not worth more than the replacement cost.
     
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  23. Wrong. There is no 2% cash back card in Canada that I am aware of. The ticket I bought was the lowest fare available that allows upgrades and one I have bought with cash before. the ticket bought was aboove the amount allowed for 100K points. If I had bought a ticket directly from the card issuer worth $1900 they would have deducted the taxes and fees and my cash cost would have been higher believe it or not. The VAT system in Canada catches all transactions. As well the fact I didn't use Aeroplan gets me the status miles. You related the cost of the ticket as 2% while my calculation is I get 37,000 miles 18,500 of them status miles and a J class seat for $555. The 37,000 miles is almost half way to a J class ticket to Europe.
    If I wasn't a frequent traveller I might have considered cash back cards; This point deal is the best in Canada that I know of.
    In effect my platinum AMEX card has that cash back whereby one can apply points to any expense already paid for with the card. And those points can also be used to purchase the Canadian equivalent of a 401 investment. I get 1.5 points per dollar apent on that card so there is value in that if used properly.
     
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  24. Wandering Aramean
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    Wandering Aramean Gold Member

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    Would you not have also received the status miles if you took a 2% cash rebate and then applied the cash to buying the ticket? I believe you would. But having the flexibility to spend that $2000 on a ticket OR something else makes cash-back more valuable than travel only at the same percentage return.
     
  25. Did you not read my post properly. I fly all the time so using points to buy plane tickets makes sense for me. I got maximum use of those points. Cash back is fine if you want other things. I travel and my CC issuer makes it easy. In fact the ticket I bought was done directly on AC with the banks CC and they dumped the $2K back into my account. All I had to do was notify them first of my intent to purchase the ticket that way.
     

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