Buying points, unwittingly

When you earn miles & points from credit cards, shopping portals, and the like, the points seem to be free, but they’re not.  In most cases, you could have chosen to earn or save cash instead.  By choosing points instead of cash, you are essentially buying points for the amount of cash not earned or saved.  Let’s look at some examples…

Credit card sign up bonuses

I recently signed up for a US Airways card from Barclaycard that offered 35000 bonus miles.  I could have chosen, instead, Barclaycard’s NFL card which currently offers the equivalent of $400 cash back.  If we ignore for the moment that the latter card has a heftier spend requirement, you can argue that by forgoing cash in favor of miles, I bought those US Airways miles for $400/35000 = 1.14 cents each.  I’d argue that 1.14 cents is a great price for US Airways miles, but its far from free.

Credit card spend

For day to day spend, you could use a credit card that rewards you with points or miles, or you can use a credit card that rewards you with cash back.  There are several good 2% cash back cards out there (the best of which, I think, is Barclaycard’s Arrival World MasterCard which actually earns better than 2% if you cash in for travel) so I like to use 2% as the cash-back benchmark.  Anytime you use a credit card that pays one mile per dollar, you are forgoing 2 cents per dollar.  So, you are essentially buying miles for 2 cents each.  Many cards offer bonus points that increase their earnings above 1 mile per dollar, though.  Here are some examples:

Example credit card (and bonus considerations)

Points earned per dollar

Cost of points earned (by giving up 2 cents per dollar)

Basic airline card (US Airways, Delta, AA, etc.) 1 2 cents
Chase Freedom (with 10% checking bonus) 1.1 1.82
SPG transfer to miles w/ 25% bonus 1.25 1.6
Delta Platinum (10K bonus after $25K spend) 1.4 1.43
United Club Card 1.5 1.33
Basic airline card, airline spend 2 1
Sapphire Preferred travel/dining and 7% annual dividend 2.14 .93
Chase Ink (cable, internet, telecom, office supply) 5 .4
Chase Freedom rotating 5X category (with 10% annual checking bonus) 5.5 .36

 

Portal shopping

An easy way to earn extra points is to start all of your online shopping at a shopping portal that awards points.  Keep in mind, though, that there are many great cash-back portals as well.  If a point-earning portal offers 5 points per dollar, and the best cash back portal offers 5% cash back, then when you choose points you are essentially buying those points for 1 cent each.  Usually the cost is higher, though.  It’s common for cash back portals to offer as much as 10% back where the best point earning options are no more than 5X.  In those cases you are buying points for 2 cents each by choosing points over cash.

Buying gift cards

Occasionally there are good opportunities to get lots of points for buying gift cards.  There are also often great opportunities to buy gift cards at a discount (see “Save money almost anywhere“).  The calculations here are the same as with portal shopping.  If you choose to earn 5X points rather than save 5%, then your cost per point is 1 cent.  If you choose to earn 5X points rather than save 10%, then your cost per point is 2 cents.

Cash & Points awards

Many hotels and some airlines offer award stays (or flights) for fewer points if you kick in some cash.  For example, a Starwood category 4 hotel room can be booked for 10,000 SPG points per night.  Alternatively, when available, you can choose the Cash & Points option: 5000 points plus $75.  By choosing the second option, you save 5000 points in exchange for $75.  In other words, this choice is equivalent to buying SPG points for $75 / 5000 = 1.5 cents each.

So What?

Buying points & miles intentionally or inadvertently is not a bad thing.  Depending on how you use those points & miles, you may end up with far more value than the cash you gave up.  I do think, though, that its important to understand the choices you’re making everyday so that you can decide for yourself whether the points are worth the price.

Related posts

Last updated on November 13th, 2015

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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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Rolling Ze Dice
Guest
Rolling Ze Dice

Nice article. Whether or not it was your goal, it makes me stop and realize that there’s always a “cost” to the miles game (above and beyond time and hassle). A lot of people say things like “I flew to Australia first class for free.” Well, no. You spent a lot of money, and earned points, but what’s the cash value? Sure, you undoubtedly traveled there for cheaper than a first class ticket if you paid cash, but it certainly wasn’t “free.”

Great article!

DaninSTL
Guest
DaninSTL

Good points, pardon the pun. I typically will double or triple dip to earn points on spend. For example I might go through topcashback to a hotel chain that I earn points for spend and use a points or miles card so although a cash back card might be better it just seems more simple to get the points or miles in the end,

Greek2me
Guest
Greek2me

An additional fact to consider is the number of points you already have affects your ability to realize the 1.5-2.0 cpp values of points we often assign to them, this making 2% cash back even more competitive. Now that I have accumulated several million points through CC signups, manuf spend, etc I find, as expected, that the marginal utility of the next 100k points is less than the first several hundred thousand. Just through regular spend using 2-5x bonus category cards (and super cheap manuf spend such as VR/BB on limited time 5x TY) plus BD and other stuff on auto pilot, I am earning more points than I can efficiently burn each year, given time and family constraints on travel. So I will be much more selective about the “cost of points” deals I pursue.

FrequentMiler
Guest

Greek2me: That’s a really good point. Its also true at the other end of the spectrum: It wouldn’t help to accumulate a few thousand miles in some program if you’re unlikely to ever get more.

John
Guest
John

It is true, sometimes I find myself inventing “needs” just to spend to get more points then I don’t have time to travel and now I just have a bunch of points I’m sitting on

ZJ
Guest
ZJ

Great article… A reality check for some, I’m sure. I realized early on that the best I can do is make sure each dollar I’d spend anyway is getting the best bonus possible. Manufactured spending is rarely worth it (to me) when all things are considered and taken into account. Your notes, combined with the time/hassle factor (which you touched on yesterday), show that this game IS NOT the walk in the park some bloggers (card pushers) make it out to be.

Cindy
Guest
Cindy

Why didn’t you get the Barclays $400 card along w the US card and add it to your $1000 limit for million mile madness?

FrequentMiler
Guest

Cindy: I thought about also getting the $400 Barclays card, but Barclays is known to be very finicky about their approvals. Case in point is that they denied my app for the US Airways business card (even though they approved the personal card)

Ford
Guest
Ford

@John

We all have to take an honest look at ourselves and decide what is money we really had to spend anyway, and what is superfluous. To your last point of having too many points you’re just sitting on, this is why I value UR points so much about TY or MR points, if one does find too many points for practical use, they can simply be cashed out.

TY points recently nerfed one of its few decent redemptions, Amazon gift cards, so unless you want to put points toward a mortgage or student loans, it’s nigh impossible to even get 1:1 for TY redemptions. MR has transfer partners at least, but when one has a surfeit of points, who really cares. UR has it all. Truly hope Citi and AmEx improve redemption options, at this point picking one of the three programs is a no-brainer for all but frequent fliers with only a Delta/AA hub nearby.

Fishing4Deals
Guest

Clarification: The Barclay Arrival card only earns 2 times points on restaurants and travel purchases.

FrequentMiler
Guest

Thanks, bf. Yes, I meant the $89 version of the Barclays Arrival card offers 2X everywhere. It’s unfortunate that it has the same name as the no-fee card.

bf
Guest
bf

@Fishing4Deals, I think you are referring to the Barclays Arrival card with no annual fee. What FM was referring to is the Barclays Arrival card with an $89 annual fee, with first year waived. That card gets you 2X on all purchases, not just travel and restaurants. As FM said, scroll down the application page and see note 2.

MileageUpdate
Guest

Lately I’m not doing any deals that costs money. Most of my mileage and point earning now earn me $ and the pts/miles.

Muerl
Guest
Muerl

I was thinking similarly the other day about Bank Direct.

Disregarding the fee your basically paying $0.008 for a mile when compared to a high intrest savings account. Though on the other side you don’t get a 1099 from them.

lkar
Guest
lkar

FM — this is a really good point, and echoes some of the points made in a recent FT thread in which I participated that I think is very worthwhile reading. One thing that has interested me — your blog and others do a great job (yours better than any) of listing the best cards to use for certain types of spend. I think think what would be really helpful is a listing of cards to use for nonbonus spend, or at least how to increase nonbonus spend on certain cards so you’re getting better than 2 percent cash back.
I tried to start a list on FT and invited others to add, but it didn’t take off. The top of this list are your ideas for 5x everywhere. Others included spending 10k on a citi hilton reserve. If you value your free night as worth 50k, you’re getting 8x on your first 10k in nonbonus spend. Club Carlson 5x is another. For PRG, if you spend 30k, you’re getting 1.5x on nonbonus spend. If you have the old (pre-November 2011) Ink Bold linked to a biz checking account, you get 1.20 per $1 plus threshold bonuses that kick it up to 1.5 to 1.7 points per $1 depending on your spend. Fairmont chase with spending up to 12k gets you a free night plus Fairmont points worth $.01 in gift cards, so like 3x to 3.5x depending on how you value Fairmont free nights.
Last, but not least, if you spend money on airfare during the year, you should never settle for 2 percent cash back ever — at a minimum, use your citi thank you premier for non bonus spend, including some airfare, and you get 2.66 cents per $1 of spend if you understand flight points. Any others?

FrequentMiler
Guest

lkar: A lot of those opportunities are listed on my Big Spend Bonuses page. Take a look!
bluecat: Yep, the PenFed card is listed on my Best Category Bonuses page.
Maggie: You can find the NFL $400 offer on my Best Credit Card Offers page.

bluecat
Guest
bluecat

The PenFed 5% cash/points back no-fee Visa on gas purchases is one of the best deals out there but is rarely mentioned by the points bloggers. They have their rea$on$, I $u$pect.

Maggie
Guest
Maggie

where is the link for $400 nfl card

CFFrost
Guest
CFFrost

Assuming Barclays loses the combined AA/US business, I may try to convert the US card to the Arrivals card. I think by the end of the year I will have reached the point that I have “enough” miles for the next year or two – time to focus on cash back.

That said, I’ll have to do the math to figure out what the “break even” point is to determine if it is worth paying the annual fee on the higher level card.

Cindy
Guest
Cindy

Makes sense. Was just thinking about the semi-recent experiments by a few people (Gary, i think, and others) with multiple barclays cards. It seems like here tightening up on that kind of thing, though.

lkar
Guest
lkar

FM — why indeed it is. Thanks very much.

DBest
Guest
DBest

I understand your point conceptually but not practically. If I earned cash back then I wouldn’t buy first/biz class, stay in 5 star hotels, etc with that money. Earning points affords me a different lifestyle than cash back would.

FrequentMiler
Guest

DBest: I agree with you, that’s why I often choose miles instead of cash back. I never meant to imply that buying miles was a bad idea, just that its good to be aware that you’re doing so. Was there something in my post that suggested it was a bad idea?

Chris
Guest
Chris

Great points. For people who mostly travel domestic Economy it is very hard to get to that 2 cents/mile utilization rate, making cash-back cards very competitive for everyday spend. In addition, using award tickets means you are forgoing (elite-qualifying) flight miles AND miles/cash-back from the ticket price.

Once you add international trips to the mix, and if you can add additional value through stopovers (aka “free one-ways”), you can approach or exceed that 2% utilization rate in Economy.

Of course if you are booking in Biz/First, then your utilization rate goes way up, but if you would have never spent that money in the first place, that “value” number isn’t real.

That’s why the real value in the points game will continue to be from the cc bonuses, smart routings, and above all, a subjective value on whatever amount you would have been otherwise willing to spend on that dream itinerary.

Chimmy
Guest
Chimmy

Good article. Keep it up.

HeavenlyJane
Guest
HeavenlyJane

Outstanding article. Made me think anew.

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[…] Buying points, unwittingly […]

Jeremy
Guest
Jeremy

Great post and did serve as a reminder of the cost of this. Its a reminder that after meeting minimum spends to get large bonuses, I’ll have to more carefully consider where my spending goes. I’d think it’d first go to earning high spend bonuses (BA companion pass, bonus points, free nights, etc) absent 5X options. Absent those I will have to seriously consider getting a Fidelity Amex card and the PenFed card.

As you and a few others have mentioned in the comments, a key thing to remember though is that while cash back is fine and dandy for domestic travel in economy and getting cash back to buy “any good hotel at the cheapest price”, earning points/miles allows us to take nicer vacations, especially international ones and teh ability to stay in nicer hotels.

Even though I (and most people) would never pay the $8K cost of a business class flight because they couldn’t, and therefore aren’t really getting 8 cents per mile in “value”, at least I get to have that flight for a lot less in points cost. Additionally, 100K points needed for a typical J flight to Europe that was earned via a 1X card (thus on $100k in spend) could have been $2,000 on a 2% cash back card. However if you would be flying to Europe in even coach in the summer, you’d probably need to pay at least $1500 for a RT flight in coach. So then I look at it as I’m paying $500 to fly business which I’d gladly do. Add in the possibility for stopovers and open jaws and it really makes it pretty comparable.

Pat
Guest

So, Visa or Vanilla is still an awesome way to shift your rent and car payment to cards and hit your min-spending for bonuses- no? $2,000 of cards and 30,000 points means two tenths of a a cent per point- doesn’t it?

FrequentMiler
Guest

Pat: I’m not sure I understand. How would you get 30,000 points from $2000 worth of cards? 15 points per dollar?

Pat
Guest

By using the cards to hit your minimum spend requirements for 30,000 point bonuses. Rent + Car will get me to the minimum spend for my two Chase Ink cards. I was going to spend the money anyway.
Transaction frees on buying $6,000 worth of cash cards is $210 or so? Then you get 66,000 points. Cash gets put on your Blue Bird.
That’s what I was getting out. Sorry for not being more clear. Is what I’m saying making sense now or am I still off?

FrequentMiler
Guest

Pat: Yes, that makes sense. Are you able to pay rent + car with credit cards?

Pat
Guest

Rent + Car. Was hoping to use miles card to buy cash cards. Then load cash cards on AMEX Bluebird. Then use Bluebird to cut checks for rent and car.
Will that work?

Brent
Guest

@ FrequentMiler

I haven’t followed FT on cashback cards. I know some that have been grandfathered in from other cashback cards or maybe some sort of travelocity card that earns 4% are hitting the Bigcrumbs > Amex GC’s for the 1.4% cashback pretty hard.

My question is.. if you have a cashback card and are doing manufactured spending to get the 2% cashback, how often are they shutting people’s cards down? If I do $3k in AZ payments and then do $10k in Amex GC’s (liquidate through VRs). How likely am I to get shut down compared to a miles/points earning card? It seems that AZ payment spending and VR spending have not lead to a high % of shut downs from reading the FT threads.. but the data points for cashback cards and shutdowns I’m not familiar with.

FrequentMiler
Guest

Brent: I really don’t know the answer to that.
Pat: yes, if you can find a place that will let you pay with a credit card for vanilla reload cards, you can do that.

Paul
Guest
Paul

FM – the Barclay NFL card is really a $600 cash back offer, as you typically get an additional $200 cb offer (20,000 pts) a few months after having the card. It’s usually spend $500 a month for 3 consecutive months and then get the second cb bonus. It’s one of the most attractive offers out there.

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[…] Buying points, unwittingly […]

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[…] a 2% cash back card instead, you are essentially buying those miles for 2 cents each (see “Buying points, unwittingly“).  Is it worth […]

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[…] many times before, when earning points or miles, it is often in place of earning cash back (see “Buying points, unwittingly”).  And, sometimes cash back opportunities are significantly better than equivalent points […]

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[…] Instead, they reflect the acquisition cost — the “going rate” for buying points, unwittingly, through credit card spend.  If the chart says that the Fair Trading price for American […]

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[…] miles when they use a miles-earning card (see Nick’s recent post on this topic here, and a really old post of mine here).  When you use a card that earns 1.5 miles per dollar, it’s like buying miles for 1.33 […]