Earn American Miles With BankDirect

Filed Under: American, Great Deals

Travis is my first new contributor to the blog, who will be posting a couple of times per week. The idea behind adding guest contributors is to add different perspectives to the blog. Travis has a unique approach towards travel, given that he travels almost exclusively with his wife and young children, which is in stark contrast to my travels, which are usually alone.

One way of earning American AAdvantage miles that is often overlooked these days is through a checking account at BankDirect. Now let me state up front, this is nowhere near as sexy as the latest manufactured spend technique. But it’s also a lot easier to understand, so easy in fact that you can probably explain it to your grandmother. It’s also a passive technique meaning you can set it up once and more or less forget about it.

If you don’t mind getting paid in miles, you can earn a very hefty return on your checking account balance with BankDirect.

Although BankDirect offers a couple of banking products that pay interest in miles, I’m going to focus on the Mileage Checking With Interest accounts.


Mileage Checking With Interest

The primary way to earn miles with BankDirect is by opening a Mileage Checking With Interest account. These accounts pay 100 miles for every $1000 you have in the account each month, up to $50,000. Above $50,000, it only pays 25 miles per $1000 of deposits.  As the name of the account implies, it also pays a piddly amount of interest — literally 0.01% — which is so minuscule that I would just ignore it. There is also a $12 monthly fee on the account, which kind of stinks since this means that over time, your bank account balance actually shrinks since the fee is greater than the interest you earn (though your American Advantage account grows).

The maximum rate of return is earned by having exactly $50,000 in the account at all times. This is because the $12 monthly fee is a fixed amount — you pay it regardless of whether you keep $100 in the account or $100,000. So you want a bigger balance such to amortize the fee over.

On the other hand, the earning rate drops by 75% once you pass $50,000, meaning if you have a balance larger than that, you’re earning fewer miles per dollar overall.

Earnings Analysis

Let’s look at the math, assuming that you choose to keep $50,000 in this account.

Since you earn 100 miles for every $1000, this means you earn 5000 miles per month. If you do this for the year, you’ll end up with 60,000 miles in your American Advantage account. You’ll also pay $144 in service fees.

Assuming you value AA miles at 1.8 cents (as Ben does), those 60,000 miles are worth $1080. But you paid $144 in fees to get them, so the net is really $936.

Earning the equivalent of $936 per year on a balance of $50,000 gives a return of  1.9%. In this era of crappy interest rates, that’s pretty darn good.

But it gets a little better.

If you had a traditional checking account, you would pay taxes on the interest you earned. Since miles aren’t taxable (don’t give the IRS any ideas!), this is actually equivalent to earning 2.5% in a taxable account, assuming you are in the 25% marginal tax bracket. Update: BankDirect is now issuing 1099s on the “Fair Market Value” of the awarded miles, which changes the math significantly.

Yes please, I’ll take a 2.5% return on a purely liquid 100% FDIC-insured investment!

Geeky Math

I created a plot of rate of return vs. account balance to help visualize the situation. As in the analysis above, I assumed that each American mile was worth 1.8 cents and that the account owner was in the 25% tax bracket.

Rate of Return vs. Average Account Balance
Rate of Return vs. Average Account Balance

This shows that for balances less than $6000, the rate of return is actually negative due to the monthly fees. You definitely don’t want to be on this part of the curve, so I didn’t even plot it. Once you have at least $20,000 in the account, the return goes above 2% and that’s about the minimum I’d want to be earning.

How safe is BankDirect?

BankDirect is the internet division of Texas Capital Bank. The FDIC insures bank accounts up to $250,000, so as long as you trust the US government, you should have nothing to worry about at least up to that level. And since the earning rate drops by 75% after $50,000, you really shouldn’t have more than $250,000 in a single account anyway.

What is the service like?

BankDirect is a rather bare bones operation as in I think I speak to the same person on the phone every time I call them. The website is not flashy and appears to be straight out of 2001. They can have some glitches getting the account setup, or at least they did with me. But the miles pretty much post every month as expected, and that’s really the important part.

(Note that there has been a minor hiccup getting miles to post this month. BankDirect is blaming it on American changing their systems ahead of the merger, which seems plausible. At any rate, they assured me the miles would post soon.)

Is there a signup bonus?

Yes. You get 1000 miles just for opening the account. Then if you are referred by someone, you and they both get 1000 bonus miles, meaning you’ll get 2000 miles for opening an account. You can only earn a total of 10,000 miles from referring friends, so this this isn’t something that you need to go viral.

The referral process requires that the referrer enter your email address in the BankDirect website, so if you’d like me to refer you, I’d be happy to. I just need to submit your email address. You can send that to [email protected]

Or if you already have a BankDirect account, feel free to leave your email in the comments if you want to refer others.

Are there any other ways to earn miles with BankDirect?

Yes. You can earn 10,000 miles for establishing direct deposit, 5000 miles for using their billpay service, and 5000 miles for using their checkcard. I’m a little embarrassed to say this, but I’ve never actually done any of those. I mostly just park some money with BankDirect and forget about it.

I’ve also never made an ATM withdrawal, though they supposedly rebate up to four foreign ATM fees per month.

BankDirect also offers Mileage CDs and Mileage MoneyMarket accounts but they don’t pay as well for balances up to $50,000 so I chose not to discuss them here.

What if I only plan to keep $5000 in this account?

You probably should not do this deal. If you keep a balance of $6000 or less, you’re actually earning a negative rate of return once you factor in the $12 monthly fee.

Given that miles aren’t as good as cash, I’d want to earn a return that is significantly better than a traditional account to compensate for the added risk of devaluation of the miles. I’d aim for at least a 2.0% return which requires an average balance of at least $20,000.

What if I have a million dollars to deposit?

Lucky you. But you should probably find something better to do with $950,000 of it. First, FDIC only insures accounts up to $250,000. Even if you like the thrill of swinging without a safety net, you’re still only going to earn 25 miles per $1000 on the vast majority of your balance. That means that instead of 2.5%, you’re going to be closer to a return of 0.6%.  (Though I guess if you have a million dollars in your checking account, you might also be in a higher tax bracket, pushing this number up slightly.)

Didn’t this used to be a better deal than it is today?

Yes. And mileage running used to be a lot more lucrative as well. Times have changed.

BankDirect didn’t used to charge a $12 monthly fee on checking accounts. And American used to count all miles, not just butt-in-seat, for the purposes of lifetime status. That means you could earn million miler status by simply parking some money in a checking account for a while! But those days are gone, so now this is just about earning award miles.

Is it really a good idea to earn miles instead of interest on my money?

That depends on whether you truly value American miles at 1.8 cents each and what your opportunity cost might be. Would you be willing to buy miles directly from AA at 1.8 cents? If so, this is a better deal.

What else could you do with your money? This is a risk-free investment (FDIC-insured). Of course you may do better in the stock market, but that’s not a fair comparison.

Do you use BankDirect? Have you had a good experience with them?

  1. @ Travis — 2% is the minimum amount you want to be earning?? PLEASE let me know where I can earn a guaranteed 2% in today’s 0% interest rate environment!

  2. Gene — Fair enough. I guess all I’m trying to say is that you should demand some premium for being paid in “funny money”.

    Also, the comp to me really isn’t 0%. You can get a 1-year CD for 1%. Sure, that’s not much, but my point is that you should really want to make a premium over whatever the comparable “cash-based” investment opportunity would be.

  3. Thanks for this article! I’m relatively new to the game and didn’t know about this yet!

    It should be noted that BankDirect also has a “Mileage Money Market” account, which is basically a checking-light account (a maximum of 6 transactions per month). It only earns half the miles, but it’s free if you have more than $10k in it. So, with your $20k example, you can choose between 24k miles for $144, or 12k miles for free. This basically makes the cost of the miles on the checking account $144 for 12k miles, which is not terrible but not that good either.

    Personally I don’t like paying for miles at all, part of the fun for me is getting them actually for free. I’d rather have 12k miles for free than 24k miles for $144. Or, going to $50k in the account, 30k miles for free yearly.

  4. Giel:

    Yep, that’s a good analysis of the MM account. With $50K to work with, you could get 30,000 miles with no cost in the MM account. Or pay $144 for 30,000 additional miles via the checking account. So you’re basically buying the incremental 30,000 miles at 0.5 cents each. Most would say that’s a pretty good deal.

    But when you’re just starting out, I absolutely advise to start small and build from there. Sounds like you are on a good path.

  5. @Gene: Ever hear of a U.S. Treasury note? And let me tell you, if they don’t pay out, you’ve got a lot more to worry about than a couple percent of interest.

  6. Interesting… Never heard of them, so def thanks for the info. I’m a bit surprised, though, that you don’t get a 1099 for the miles. I thought credit card miles are tax free because they are seen as a rebate on purchases. If you earn miles through a bank account, though, this was taxed as interest.

  7. Remeber if you hare married or have a close relative you can count on you can open mulitple accounts each for $50,000. For example – you, your spose, you and your spouse, Of course, managing all of these could get to be a headache.

  8. $936/yr profit assumes that $50K asset will otherwise be stored under the mattress. So in reality, the profit is less than $936, though still in the positive range 🙂

  9. Chister — I don’t think I ever used the word “profit” in this post. I said that $936 is the value of the earnings on the year. And used that to determine a rate of return.

    You can then compare the ROR from this “investment” to your other investment opportunities and determine if this “investment” makes sense for your portfolio based on it’s risk and return.

  10. Bill — I think the terms say one checking account per household, though I have no idea how they would enforce that.

  11. These guys are a schlock outfit. I’m a 1%er and tried to open an account but was denied because I had opened “too many” other bank accounts. But 1%ers tend to do that…because they are 1%ers…

    Was a face palm kind of moment. Impossible to argue with stupid.

  12. Any other suggestions on what to do with $50-100K of cash that I’d want to keep liquid, but wouldn’t mind earning miles or sign up bonuses with it.

  13. I just went to the AA mileage website. 110,000 miles can fly me from USA to Asia, Business class. The average cost of those tickets are 5,000 USD. So wouldn’t the 50,000 money parking really equate to 5% seeing as in 2 years of your money parked (assuming you did a short flight within 18 months so points don’t expire) you would accumulate 120,000 miles, which affords an estimate 5,000 USD Business class ticket to Asia ?

  14. I agree with John Ong. I fly Cathay Pacific to visit my son in Hong Kong and my in-laws in Thailand every year. This deal will give me a free round trip in business class every 2 years. My total cost is $144 per year in fees, plus an interest deficit (compared to a high-yield savings account) of maybe $1000, but a heck of a deal. I value an AA mile at 5 cents, btw, just as brother Ong seems to.

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