Greg might have ruined miles and points for me yesterday.
In yesterday morning’s post about the Business Gold card, Greg made a comparison that I haven’t been able to get out of my head. Here’s the paragraph, with the key sentence bolded:
The Amex Business Gold card is the only transferable points option to earn more than 3X at gas stations (the Citi Premier earns 3X). Still, since multiple cards offer 5% cash back at gas stations (found here), the potential to earn 4X is not so exciting. If you forgo 5% back in order to earn 4X, that’s like buying Membership Rewards points for 1.25 cents each. That’s not a bad price, but I wouldn’t personally pay this card’s high annual fee just for the privilege of buying points at that rate.
Am I the only person who read that sentence and felt like I’ve been over-paying for my points? It made me want to take a look at the cost of all of the various points in my pocket.
Tricky mental arithmetic
Just like anyone else in this hobby, I love transferable currencies. They allow me to unlock the best possible values and enable me to use my points for experiences I wouldn’t otherwise buy — like first class flights, fancy resorts, etc.
Of course, there is an opportunity cost to earning those miles and points — one could easily earn 2% cash back with no annual fee (or even better as Greg showed last week). For that reason, and because I generally tend to look for good sweet spot opportunities, I tend to value all of my transferable currencies at 2 cents per point for which mental math. Therefore, if a card earning a transferable currency is earning 3x for a purchase, I think of it as the rough equivalent of 6% back.
And I know I’m not alone in that mental fudgery with the numbers. In fact, if you go to our Best Category Bonuses page, you’ll see that we even list a column with an approximate percentage equivalence for transferable currencies based on our Reasonable Redemption Values for each point. As an example, the ThankYou Premier earns 3x ThankYou points at gas stations. Because our reasonable redemption value for ThankYou points is 1.82c each, we list the estimated value of the return on spend at 5.46%. That kind of number (or my mental math number which would value the return at about 6%) makes it easy to justify using the ThankYou Premier over a cash back card.
But Greg makes a great point that every time you have made that trade-off, you have almost literally bought a ThankYou point for 1.67c — because you traded away the chance to earn 5% back on that purchase. I think the words “opportunity cost” might soften the blow too much.
While I can’t realistically see myself giving up on transferable currencies any time soon, Greg’s concept of buying points made re-think it in many scenarios. I suddenly wanted to take a look at the cards that earn the best category bonuses and find out what price we’re paying to earn those points over cash back. It was a little trickier than I expected — and my points are more expensive than I’d considered.
Cost of each point
In the chart below, I picked out the card with the overall best category bonus from each of most of the categories on our Best Category Bonuses page (or when return was equal across several cards, I sometimes included more than one). I then listed the best alternative in terms of cash back and the cost per point.
Of course, this is a bit murky. For example, I list the Uber Visa as the best alternative for hotels since it earns 3% cash back. Of course, you could use the US Bank Altitude Reserve for 3x and then redeem your points for 4.5% back when used towards travel. Some people have certainly mastered the art of getting solid value out of those points. But then you can also use Sapphire Reserve points at 1.5c each — but you’re tied down to using them for a specific category, etc. I tried to keep things simple in comparison.
It’s also worth mentioning that in some cases, I used a limited-time spending bonus for comparison, which you may consider unfair. In the case of US Supermarket spend, I compared against the Wells Fargo Cash Back Visa, which only earns 5% for the first 6 months and only on up to $12,500 in spend. Funny enough, the cost of a moderate plan for feeding a family of four is $239 per week according to the Internet (though those stats are a few years old), which conveniently comes out to $12,428 per year. If you were to buy grocery store gift cards during those first 6 months to max out the cap, you can likely effectively earn 5% back on a year’s worth of groceries (give or take). I felt like it was a fair enough comparison.
Here’s the cost of earning transferable points in the following categories:
|Category||Best Bonus||Earn Rate||Alternative Card||Alternative Earn||Cost Per Point||Notes|
|Car Rentals||Chase Sapphire Reserve||3x||US Bank Cash+||5% (up to $2K / quarter)||1.67c||If you spend much more than $2K per quarter, cost per point decreases.|
|Department Stores||Citi AT&T Access More||3x*||US Bank Cash+||5% (up to $2K/quarter)||1.67c||*AT&T Access More earns 3x at most “online” retail & travel merchants, but only 1x in person.|
|Drugstores||Diners Club||3x||Wells Fargo Visa Signature Card||5% (for the first 6mo on up to $12.5K in purchases)||1.67c||Diners Club hasn’t been available since they ran out of plastic like a month or something into issuing it a few years back.|
|Gas||Citi Premier / Diners Club||3x||Ducks Unlimited||5%||1.67c|
|US Supermarkets||Amex Gold||4x (on up to $25K in purchases, then 1x)||Wells Fargo Visa Signature Card||5% (for the first 6mo on up to $12.5K in purchases)||1.25c||While the Blue Cash Preferred Earns 6% on up to $6K, I compared to the Wells Fargo card because of its higher cap, though note that the Wells Fargo offer is only for 6 months rather than annual|
|Hotels||3x||Uber Visa||3%||1c||Those with BOA Platinum Honors could earn 3.5% or the Altitude Reserve earns an effective 4.5% when used towards travel, which may change your cost.|
|Office Supply Stores||5x||Amex SimplyCash Plus||5% (on up to $50K per year, then 1%, US only)||1c|
|Phone, Cellular, Internet||5x||Amex SimplyCash Plus||5% (on up to $50K per year, then 1%. US wireless telephone servies only)||1c||If you also use your card to purchase Internet services, the FlexPerks cards would provide the best alternative, but only earn around 3% back.|
|Restaurants||Amex Gold||4x (US restaurants only)||4%||1c||Beginning in January 2019, the Citi Prestige will offer 5x.|
|Airfare||Amex Platinum||5x (when booked directly through the airline)||Uber Visa||3%||0.6c||There are a number of travel rewards cards that earn fixed-value points that are worth more, but I used the Uber card as a simple cash alternative.|
|Other Travel||Chase Sapphire Reserve||3x||Costco Anywhere Visa||3%||1c||There are a number of other cards earning 3% returns on travel.|
How this complicates things
The chart above may not seem revolutionary — though truth be told, I’m not sure I’d be willing to pay north of 1c per point as is the case in several categories above. However, it complicated my math in other ways.
Yesterday, I did a little planning for my trip to Bora Bora next year. I’ll be flying into Tahiti, and flights from Tahiti to Bora Bora can’t be booked on miles. However, they can be booked through the Chase travel portal. Flights are in the $400’s round trip, which sounds very painful for a 50-minute flight (I was aware of the cost before I booked the trip). However, the options I was looking at cost around 29,000 Ultimate Rewards points when booked through Chase. Through Manufactured Spending techniques, I figured that my worst-case scenario was that I could generate the points for each person for about $185 — still expensive, but a much more manageable figure.
However, my math on cost only considered my MS costs — not my opportunity cost in earning the points over cash back in the first place. In that specific example, the best alternative is to earn 1c cash back, which isn’t materially different to me since the Ultimate Rewards points are also worth 1c in cash. Of course, my cost for those flights isn’t only $185 — it’s $290 since I could have redeemed those points for cash. Still a good discount over full price, but not as nice as it feels to say they cost me $185. The same obviously goes for hotel redemptions, etc.
But a more salient example might be something like using the AT&T Access More card for 3x at online department stores over the US Bank Cash+. I’ve transferred ThankYou points to Avianca several times this year to book one-ways on United within US Region 1 for 7500 points each way plus $30.60 in tax. Assuming I’d earned those points at 3x via online department stores, it would have required $2500 in spend for a one-way. That felt like a pretty solid deal. That same $2500 in spend on a US Bank Cash+ (split over two quarters since there is a $2K/quarter cap) would have earned me $125 – making my total cost for those award flights north of $150 one-way. While that still represents a slight discount over the cash price in my case, it’s less of a deal than it initially appears.
And the deal gets even worse if I were to use those points through the ThankYou portal, where I’d only get a maximum of 1.25c in value (since I have the Citi Prestige card also and pool my points). If I used those 7500 points to book travel that qualifies for the 1.25c rate, I’d only get $93.75 in travel — a loss of 25% over what I could have earned with the Cash+ card.
Furthermore, the chart above only takes into account using the card that earns the best category bonus for purchases. If you use a card that earns a lesser bonus, your cost goes up. For example, I used my Ink Plus card for gas yesterday (that’s right, even a blogger like me gets caught out there now and again without the right card in his wallet and without his Gear S3 watch for Samsung Pay). I earned 2x — but that comes at a cost of 2.5c per point since the Ducks Unlimtied card earns an uncapped 5%. I don’t have the Ducks card — but by choosing not to and choosing to use my Ink Plus, I effectively bought those points at a pretty steep price — much higher than I’d have paid if I were to take cash out of my pocket.
Restaurants are another area where cost per point can monkey with your value math. For instance, if you were to dine at a restaurant that does not accept Amex, you’d likely consider paying with the Chase Sapphire Reserve. Since that card earns 3x vs the 4% options on the table, you’re effectively paying 1.25c each for your Ultimate Rewards points. While you certainly can get more value out of them, if you were to use them to book travel for 1.5c each, the win just isn’t huge. A win is a win, but it’s important to keep it in perspective.
Those are just a couple of examples to illustrate that those category bonuses don’t always come cheaply. While you’ll still catch me paying for groceries with the Amex Gold and using a CSR at restaurants that don’t take Amex, I’ll be more carefully crunching numbers on redemptions. Last week, Greg mentioned his gradual lean towards cash back simply because his transferable balances dictate that it’s time to diversify. While I don’t feel like I have nearly as many transferable points as I’d like, I think the cash back alternatives are an important consideration that I probably need to think about a bit more. I lied a bit at the top of this post — Greg didn’t really ruin miles and points for me. I know there are plenty of spots where I can get outsized value out of the points. But he definitely made me consider the cost of category bonuses more carefully, and I think that’s a good thing.