The Cost of Credit Card Points

Earning points and miles from credit cards is not free. I’ll explain why.

Almost every major airline and hotel program allows you to earn points or miles by using a rewards credit card. When people get points in this way they tend to think of them as free, but they are not. The reason? By using a points-earning credit card, you are giving up the chance to earn cash back (or the equivalent) at a fixed rate.

There are several credit cards that give a fixed 2% return on all purchases. For example, both the Capital One Venture and the Escape Discover Card give 2% back in the form of travel credit. Even better, if you have a Fidelity account, you may be able to get the Fidelity Investment Rewards American Express Card which gives 2% cash back on all purchases. If you really want to maximize your cash back earnings, you could get a 2% cash back card for basic purchases, and then use a card like the American Express Blue Cash Preferred and earn 3% cash back at gas stations and department stores and a whopping 6% back from grocery store purchases!

While it is possible to earn more than 2% on credit card purchases, I consider 2% to be the benchmark rate for credit card earnings. By juggling cards, as I described above, you can do better than the benchmark, or with a 1% cash back card you can do worse. For example, if you use a 1% cash back card, then with every purchase you effectively lose the additional 1% you would have received from a 2% card! By the same measure, the points you earn from points-based cards cost you 2 cents for every dollar spent on the card. Since most points-based cards give 1 point per dollar spent, this means that most people effectively (and unknowingly) buy points for 2 cents each every time they use their credit card.

Most credit cards have bonus categories that allow the card holder to earn more than one point per dollar spent in those categories. Frequently, the bonus categories are limited to money spent at the particular hotel or airline that co-brands the credit card. Other times there are broad categories such as travel, grocery, or dining that will result in more points. As bonus categories are more frequently used, the cost per dollar of points goes down. In order to estimate the cost of points purchased via credit card use, it is necessary to estimate how much will be spent within such bonus categories. For every person, the true mix will be very different, but for this analysis I took a stab at estimating each common category:

Bonus Category

% of Spend Within Category

Specific Hotel Chain

2.5%

Specific Airline

5%

All Airfare

7.5%

Dining

20%

Gas

15%

Grocery

25%

Travel

15%

 

With the chart above, we can now estimate the cost of earning points and miles from credit cards. For this analysis, I’ll examine three popular credit cards and compare them to standard airline branded cards that earn 1 mile per dollar except within their limited category:

Typical Airline Card

Most airline branded credit cards give 2 miles per dollar spent directly through the airline and 1 mile per dollar for all other purchases. If we accept from the chart above that 5% of a cardholder’s spend would be with the airline, then that means that the cardholder would earn, on average, 1.05 miles per dollar. Compared to the 2% cash back alternative, that amounts to buying miles for 1.9 cents each. While that rate is better than buying miles directly from the airline, it is often possible to buy miles for much less. I’m not saying that airline credit cards are a bad deal – they often come with many perks (free bags, priority boarding, etc.) that make them worthwhile. However, you may want to think twice before using them for day to day spend.

Starwood Preferred Guest® Credit Card from American Express

The SPG card gives 2 points per dollar at Starwood hotels , and 1 point per dollar everywhere else. If 2.5% of purchases are made at Starwood properties, then the cardholder would earn, on average, 1.025 points per dollar. This translates to 1.94 cents per point. While this sounds pretty expensive, I’ve found SPG points to be quite valuable when used for hotel redemptions. The interesting thing about this card, though, is that you can transfer the points to airline miles and get a 25% bonus when doing so. For example, if you transfer 20,000 SPG points into American Airlines miles, you will get 25,000 AA miles! So, if we take that into account, the 1.025 points per dollar one earns can become 1.28 miles per dollar. The cost, then, goes down to 1.56 cents per mile. Not bad!

American Express(R) Premier Rewards Gold Card

The Amex Premier Rewards Gold Card gives triple points for airline tickets and double points for gas and groceries. Using the chart above, this means that the cardholder would earn, on average, 1.55 points per dollar. That amounts to buying points for 1.29 cents each. Even better, American Express often runs promos where the transferred points are worth even more. For example, you can often get 1.5 Delta SkyMiles for each Membership Rewards point transferred to Delta. In that case, your miles per dollar earnings increases to 2.33, and the cost for “buying” Delta miles goes down to less than a penny per mile (.86 cents)!

Chase SapphireSM Preferred Card

 The Chase Sapphire Preferred gives double points for all travel and dining expenses, and triple points for travel booked through their site. Additionally, cardholders are given an annual 7% bonus on all points earned each calendar year.  This means that the cardholder earns, on average, 1.52 points per dollar. That amounts to buying points for 1.31 cents each. If all else were equal, this is better than the SPG card and about equal to the Amex card (without counting the Amex 1.5x transfer bonus). Of course, all-else is not equal: it can be argued (and has been argued) that the transfer partners available to Ultimate Rewards are much better than the transfer partners available to Amex Membership Rewards. In future posts, I’ll attempt to quantify this difference so that we can make a better apples to apples comparison.

Juggling Cards

In addition to picking the single best card for “buying miles”, it’s possible to bring the cost of miles down further by using multiple cards. Use the Amex Premier Rewards Gold for gas and groceries. Use the Chase Sapphire for dining and all travel expenses, and use the SPG card for everything else. In that way, you will earn, on average, 1.88 points per dollar. If you transfer the earned SPG points to airline miles, and transfer Amex points to miles during a 1.5X transfer promo, and use the Amex card for airfare and dining, the earnings per dollar goes up to 2.62 cents per dollar. This amounts to buying miles for .77 cents each!

Analysis

There are many benefits you can get from credit cards, but if your main goal is to get points and miles you should look carefully at how much those points cost you. There are several non-miles earning credit cards that can give you the equivalent of 2% back, so if you don’t value points and miles you should look seriously at those options. If you do value points and miles, then the earning power of your credit cards should be looked at closely. From the example above, it is clear that juggling cards is the best way to maximize your returns. If that’s too much trouble, however, you’ll still do better using a card like those shown above instead of a standard airline rewards card.

About Greg The Frequent Miler

Greg is the owner, founder, and primary author of the Frequent Miler. He earns millions of points and miles each year, mostly without flying, and dedicates this blog to teaching others how to do the same.

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  1. Left out of the calculation is that with some airline cards you also earn Elite Qualifying Miles. With a spend of $25K on my Delta Plat Amex I earned 10K EQM. If I had put that on a 2% cash back card I would have earned $500. If I was lucky, I could use that $500 to buy additional tickets to fly the 10K miles but deals at a rate of less than 5 cents per EQM are harder to find these days. And there would be the time required to fly the flights plus incidental expenses. By using the Delta card I can spend an extra weekend or two at home, plus I do earn at least 25K Skymiles (plus a bonus of what I spent with Delta).

    Without the EQMs I agree, a cash back card is typically a much better deal.

  2. I mostly get airline and hotel credit cards for the sign-up bonuses, and use AMEX Blue Cash Preferred for much of my shopping, especially in the 6% and 3% categories (local grocery stores offer a variety of gift cards). So, I get lots of cash back and lots of points and miles.
    Using this strategy most of my travel is free and I get extra spending money, too.
    Some airline cards provide extra perks like free bags, so I hang onto a couple of those and use occasionally.
    And some hotel cards give you a free night each year and are valuable to keep for those.

  3. Doesnt this disregard earning extra pts for CSP by going through their travel website (3x vs 2x) and their 7% pts dividend? Does Amex Gold Mem rewards give 4x thru their website vs just 3x?

  4. Same thing for SPG. You can earn up to 5x using their website and transfer 1:1 to airlines. Personally i do CSP for all travel and dining at 3x and 2x respectively ex hotels which i do SPG at 5x and all other spending on the SPG at 1x. Any ways to get better?

    • Dan: thanks again. I’ll update the SPG part. Yes, you can do a little better with travel by going through the UR Mall to Travelocity and get another 2 points over the 2 standard points for travel. So, 4x for airfare instead of 3x going through Chase. Plus the 7% annual bonus too. I didn’t want to confuse the post with online mall earnings, though. That adds too many variables!

      9:35 EST: Updated the SPG details to account for 5x online purchases

  5. Technically you should not say the SPG card gives 5 points per $ spent at Starwood hotels. I’m sure you meant to say that 2 points per dollar from the credit card and 3 points if you are a gold/plat. Though, even that is not fully correct because the 3 points per $ spent as gold/plat does not apply to cash and points and certain incidentals, where as the SPG Amex will still give you 2 points per $ as long as they come from a Starwood hotel. I’m also not sure where the whole “booking online” comes in to play. Was hoping you could explain that part.

  6. I think Bob is spot on. In the last year, I have almost never put any spending on a credit card unless I was working on a sign-on bonus spend requirement.

    I would go so far as to say that, if you are NOT currently working on sign-on bonus spend requirement, then you are either (1) not looking around hard enough for new cards or (2) have figured out a magic way to get spending done quickly that you are exploiting (e.g., some sort of new “US Mint”)

  7. You need to account for annual fees which is why I probably won’t be keeping my Capital One Venture when the annual fee hits. The $59 annual fee will mean I’m only getting 1% on the first $5900 of spend. I’d rather save that spend for sign up bonuses on other cards.

    Also, unless you are big spender, the number of miles you’re effectively buying is pretty small, so I don’t think it’s really worth worrying about. Good topic for discussion though.

    If you really want to consider how much that 1x card is costing you per point or mile you also need to consider the cost of not buying AMEX GCs with your highest cash back card and earning bigcrumbs cash back. That can easily add another 1%. The scenarios are endless. 😉

    • FredW: Regarding earning elite qualifying miles: yes, absolutely, that changes the equation dramatically. I’m planning a future post to detail some opportunities like the one you mentioned. Also, I wasn’t really arguing that cash back cards are a better deal. My point is just that people should be award of the lost opportunity when they spend on a points/miles card and make sure the miles, points, and other perks are worth it to them over the cost of giving up 2% cash back.

      Bob: Yep, you laid out a great strategy for maximizing cash back and points. Thanks

      Brent: Thanks for the correction about SPG. I’ve taken the calculation back down to 2 points since not everyone has elite status. For those with Elite status, please note that you can do better than what is shown in the post.

      bluecat: True. travel hackers can do much better. The point is to show the cost of regular spend on a card. If you don’t have any regular spend, then the data doesn’t really apply to you!

      HikerT: Yes, I went back and forth about whether to include annual fees and ultimately decided not to. The reason, besides my laziness, is that most rewards cards offer other benefits that can justify the annual fee beyond the points back on purchases. Regarding Amex cards: I see that as a “hack” to improve your earnings in almost any scheme, but it is also one that people outside of communities like this don’t know about or use regularly. So, I wouldn’t count it as the benchmark against which to compare.

  8. On the subject of American Express points. Did you know your neighbor or your mother will get a catalog of discount purchases with miles that “you” can’t use. I was going to use points for an item I saw in my mother’s spring catalog which was at a 25% point discount. When I went to order, I was told that offer was not available to me. It is only available to those they sent the catalog to. So much for earning double points on advertising. Something wrong there. Why are my points worth less than hers? You can see the catalog online at membershiprewards.com/spring. You just can’t take advantage of the deals.

  9. I can not for the life of me figure out the equation of how you got from x.xx cents per dollar spent on the credit cars to x.xx cent cost per mile. So for example how do you get from 1.05 to 1.9 under typical airline card and how from 2.62 to .77 under juggling cards. Anything you could provide her would be helpful. I’m trying to figure out my juggling cards rate.

  10. As a follow-up there is some kind of compounding effect going on, but I just can’t figure it out! An equation would be invaluable. Thanks. Love the site.

  11. Matthew: I’ll see if I can setup a Google Doc spreadsheet for this so that you can play with the numbers. The basic idea is that I estimated what % of spend would be in bonus categories. So, I estimated that, overall, you would earn 1.05 miles per dollar with a basic airline card because 95% of spend would be 1 point per dollar and 5% would be 2 points per dollar.

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