Are cash back cards the new airline cards?

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The new Air France KLM credit card launched the other day, and I wrote that the card isn’t particularly exciting. A few years back, I probably would have thought that an airline credit card offering 1.5 miles per dollar was something special — but these days, every transferable currency has a card that earns an equal or better return (and in the case of Air France, they happen to be transfer partners with everyone). Then another comment on a different post — this time about the newly-revamped Amex Gold card — got me thinking about miles and transferable currencies versus cash back. In turn, that made me wonder: are cash back cards the new airline cards – or should they be in our eyes?

The easiest way to earn miles without flying will always be through welcome bonuses. Opening a new credit card and meeting the minimum spending requirement for a bonus is always the fastest way to earn miles, whether earning directly with a specific loyalty program through one of the top airline card offers, or earning transferable currencies.

However, when the luster of new account bonuses is gone, whether because you’re locked out of the bonuses you may want or you just don’t want to open five or ten or thirty new cards per year, you next have to consider your return on everyday spend. For a lot of people, food makes up a big part of the budget. That’s one of the reasons I was so pumped for the new benefits on the Amex Gold card: US Supermarkets and US Restaurants make up a healthy portion of our personal spending each year. The card created such buzz that Greg had to ask: Did Amex’s new Gold card kill Chase’s Sapphire Reserve?.

However, not everyone is feeling it on the Amex Gold card. in the comments on that post, reader Hari had this to say:

My first mental reaction was fairly dismissive: Hari’s comparing apples to oranges. I’d take 4 Membership Rewards over 4% any day of the week. Of course, if you value Membership Rewards points at more than 1 cent each, the second half of my statement has to be true for you, too. Right?

Hari’s comment didn’t get me thinking too seriously about the Uber Visa card. Four percent cash back on dining with no annual fee doesn’t sound bad, but I’d rather take 3x on dining with a Sapphire Reserve and get to choose between transferring to partners or redeeming for travel through the Ultimate Rewards portal at 1.5 cents per point (approximating a 4.5% return when used towards travel). I feel like the Uber card’s return on dining certainly isn’t bad, but neither is it category-leading. With no annual fee, it’s definitely not bad for dining.

The other cash back categories on the Uber card excite me less. I’d say that anyone spending enough on airfare and hotels to care about them as a category bonus should probably have a premium credit card for its trip protections (while still probably earning 3x). Two percent for online purchases isn’t notable since you can get a card like the Citi Double Cash that earns an effective 2% back on all purchases with no annual fee.

Further, 2% or 3% back in a limited range of categories doesn’t stand out because there are two options on the market that earn an effective 3% back in the first year with no annual fee (for at least that first year):

The Discover IT Miles card earns 1.5 “miles” (really like “cents”) everywhere, with your year-end total being doubled at the end of the year. Since Discover “miles” are worth about once cent each, you’re earning a 3% return in the first year. The Alliant card earns a flat 3% back for the first year and waives the $59 annual fee the first year (in year 2, it earns 2.5% back and carries the $59 annual fee).

Either of these cards offers the “ease of use” factor that Hari is looking for. Neither offers as good a return on dining. However, either one blows most airline credit cards out of the water.

Our Best Airline Card Offers page ranks airline credit cards based on first year value. That’s taking into account any introductory bonus and the opportunity cost of putting spend on those cards when spending towards the new cardmember bonus. But after the new cardmember bonus, the ongoing earn rate on most airline cards is 1x. A couple of cards earn 1.5x everywhere (such as the Virgin Atlantic credit card, the United Club card, and the new Air France KLM card), but most earn 1x everywhere.

However, in many instances, you can do pretty well with a cash back card and mileage sales. Just within the past few months, we’ve seen the following sales on purchased miles (all of which since expired):

And those are just a few recent examples. I don’t track opportunities to buy miles closely; I imagine one can find other interesting opportunities with some effort. Normally, I’m not much of a fan of buying miles, at least not speculatively. But what if earning cash back and buying miles is your strategy? If you were earning 3% cash back and then buying miles during sales like those above, your effective earn rate in miles per dollar spent would be:

  • Avianca: 2.18x
  • American: 1.74x
  • United: 1.6x
  • Aegean: 1.43x
  • Alaska: 1.43x

All of the above rates are much better than you would do with any of the respective airlines’ credit cards except United (it’s only slightly better than the 1.5x everywhere earned with the United Club card). It’s also worth noting that one can earn 2x American miles on purchases at grocery stores with the MileUp card, which beats the cash-back-to-miles strategy if you spend mostly at the grocery store.

In terms of unbonused spend, most of those rates are pretty attractive. The fact is that cash back can be an effective way of “earning miles”. Put another way, earning cash back isn’t just an alternative to earning miles, but it can be part of a miles earning strategy. It probably won’t become anyone’s entire focus as not all airlines sell their miles cheaply. But it certainly can be a way to get great value out of your cash back.

While Alaska and Aegean would each return less than 1.5 miles per dollar spent using this strategy, those miles tend to be more valuable. Surely, many readers transferred SPG points to those airlines in years past at a 1:1.25 ratio, having effectively earned 1.25 miles per dollar spent. Earning at 1.43 is significantly better.

Of course, the above examples are based on perfect scenarios in the sense that you’ll have had to have earned at a rate of 3% cash back (presumably only possible a year at a time) and been able to (and wanted to) buy miles in the quantity necessary to get the best pricing. That’s a lot of assumptions – if you have to buy more miles than you want/need to get those rates, the strategy loses steam. Also important is which type of miles you want. While both Star Alliance and oneworld are represented in the examples above, those won’t be as helpful if you’re looking for Skyteam redemptions (of course, Air France is an Alaska airline partner, so you can use Alaska miles for travel on some Air France routes). However, the examples above are not meant to be comprehensive — you may well be able to find the right opportunities to buy in other programs and make a cash-back-for-miles strategy make sense.

However, in terms of earning cash back at a high enough rate to make the strategy worthwhile, don’t forget that you can boost your earnings every day through a variety of cash back strategies — and this part doesn’t rely on using a cash back card to start. Card-linked offers from apps/programs like Dosh, Spent, Acorns Found Money, Retailmenot, etc can easily add 1% or more to your normal earnings at many retailers – enabling you to stack a greater return whether spending on a transferable currency card or card back card. Here are posts on some of those programs from recent months:

Doctor of Credit maintains an excellent resource page on these and many more card-linked programs. The fact is that an extra 3% on gas could be an extra 2.18 LifeMiles per dollar spent. Of course, it could also be three pennies per dollar in your pocket — the advantage of cash back is being able to choose when you can leverage it for more value as miles and when to use it to buy yourself something nice. Know when to hold ’em, know when to fold ’em — but it’s hard to win if you’re not playing the game to the best of your ability.

At the very least, these card-linked programs and cash back cards offer return that is worth some attention. If you had a card that earned an extra 2 miles per dollar at the gas station over the other options in your wallet, you would likely use that card. And the fact is, you do. It can be any card in your wallet thanks to the ability to buy miles cheaply — and it doesn’t have to be limited to one airline. It’s not revolutionary to imagine cash back as the ultimate transferable currency, but it’s worth noting that it might be even more valuable when leveraged as purchased miles.

Bottom line

Many miles & points fanatics focus on earning transferable currencies. That’s a strategy I have also followed and one on which I continue to focus most of my spending and earning. However, with the frequency and pricing of mileage sales these days, cash back should also be part of a well-rounded strategy to earning miles without flying.

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