Is it time to rethink the cash back credit card?

In the past I would never even consider a cash back credit card, mainly because 1% cash back just isn’t exciting, and more importantly I love miles. Part of my obsession with miles is all in my mind (it’s a big game, after all), but at the same time they do get me some killer vacations. A good chunk of the miles I earn from credit cards, though, are from sign-up bonuses, which can be pretty darm rewarding.

That being said, I have to wonder whether it’s time to consider a cash back card again. Take, for example, the Charles Schwab Invest First Visa. It has no annual fee, no foreign transaction fees, and most importantly, offers 2% cash back. With mileage earning credit cards, you typically earn one mile or point per dollar, which it would be hard to argue is worth two cents. I would argue an airline mile in any program isn’t worth two cents, and I don’t even think an SPG point is worth that much. 1.5 to 1.75 cents per mile seems right, and that’s on the high side.

But I still don’t think I’ll be getting a cash back card, and it’s mostly my mind playing games with me. If I buy a cookie at Panera for $1, I earn one mile. That’s a mile closer to a first class trip to some place 10,000 miles away. If I paid with a cash back card, on the other hand, I’d earn two cents. What are two cents? 2% of another cookie? 😉

So what am I missing here? Why aren’t all of us mileage addicts being rational and switching to a 2% cash back credit card?

Filed Under: Advice, Credit Cards
  1. Why?

    Because if I spend $140,000 on a Schwab Invest First Visa, I get $2,800 back in cash. That’s good, sure.

    But if I spend that same $140,000 on, say, an Alaska Signature Visa, I have 140,000 Mileage Plan miles, enough for a ticket in First on Qantas to Australia. I just pulled up a random date in March 2010 and came back with a fare of $20,094. That’s over seven times as valuable as the cash back.

    Of course, if one has no intention of flying in First or Business overseas, or if one already has plenty of miles for doing so from other sources, then this calculation changes. But that’s how I look at it.

  2. We simultaneously value our miles at far less and far more than 2 cents.

    Iin the short-run, and at redemtpion time, we value them as a first class international award. Sure that may be yielding 10+ cents a miles, though we’d never buy the ticket at that price, but it’s certainly more than two cents. It gives us what we WANT fare more than the 2% cash back.

    In the longer run we realize that award charts change, award seats are capacity controlled, and we have lots of miles so investing more in those miles at the margin than 2 cents makes little sense except to top off towards a specific high value redemption award.

    ingy argues that he can’t save the incremental 2% cashback. But he can save his miles so they wind up worth more.

    Credit card spend tops off mileage accounts, and helps towards those high value awards. If those are what we value they may be worth more at the margin than the extra modest amount of cash.

    But there are indeed some irrationalities or at least unclear preference functions in all of this….

  3. The value of the mile depends on when and where you spend it. Two years ago my wife and I used the miles I had built up doing mileage runs, and flew American Airlines first class AUS-DFW-LAX, then Cathay Pacific business class from Los Angeles to Hong Kong and then Bangkok. Coming home we were on JAL buisness class from Bangkok to Tokyo to Chicago, then AA first class back to Austin.

    Based on the cost of the ticket, my miles averaged out to a little bit less than 13 cents per mile. Those miles let me take a trip I otherwise could not afford. For me, the miles are better than the cash back.

  4. Totally agree with Gary. For me, redemptions are all about things I can’t actually afford or things where I would never actually spend that amount of money.

    For Asia Biz/First, even at a conservative $8k and 120k miles, that’s 6.4 cents…

    For SPG, thing of a Cat 4 for $250/night. If you can do cash + points (4k points + $60), you are getting 4.75 cents…

  5. The American Express Blue Cash gives 5% back (5 cents on the dollar) for groceries, gas and drugstore purchases after you’ve reached $6500 spending in a year, and 1.25% back on everything else (for the first $6500, the rebates are 1% and 0.5%). If half your purchases are groceries, gas and at drugstores, it starts beating your 2% card at around $14,000 annual spending.

  6. It depends on what class you fly in. If you’re OK with flying economy everywhere (and I am :), the cash back cards made a LOT more sense this year (2009) than mileage cards. To me, 1 mile = 1 cent (full stop), so a 25k saver award was worth a $250 ticket. I was buying UA L fare tcons for <$220 AI and earned mileage on them. To me, using a 2% cashback card was a no-brainer.

  7. I also have to add that you really *can’t* ignore the sign-up bonuses. Mileage cards give you 15-30,000 miles for signing up. I have yet to see a 2% cash back card that gives you $600.00 for signing up…

  8. Getting a Business or First class international award mileage ticket is one of the best values for using your credit cards, so the cash back credit card option is of diminished worth realtive to the cost of a $20K F or $10 K Biz ticket.

  9. @Blake: 120k*0.02=2.4k for a transpac C ticket that doesnt give eqm/rdm. It all depends on how much you value that..But even on NH/SQ, I would hesitate before paying that. On UA, no way in hell

    HunterSFO makes a good point as well

  10. All excellent points, and of course I agree with most of you at the end of the day, since I *do* use (and will continue to use) mileage earning credit cards. I do have a few more thoughts, though:

    — I have to disagree with those of you that use the “face value” of premium tickets in setting a “value” to a premium award. For me the sticker price really doesn’t matter. It’s all about how much I’m willing to pay, and frankly when flying to Asia it wouldn’t be more than $3,000 or so roundtrip for first class. I’d rather sit in coach and think of the $100/hour I’m saving by sitting in the back (but of course this leads to an entirely different argument regarding premium redemptions vs. coach redemptions).

    — To further complicate the game, it’s worth factoring in the value of the miles, status, and upgrades you would earn if you bought a revenue ticket using the cash you earned from your cash back credit card. There’s no reason I couldn’t book United coach to Asia, upgrade with SWU’s, help requalify for 1K, and earn 40,000 miles in the process. If you don’t want to factor that in when doing your math, you’d have to add 40,000 miles to the cost of your award ticket, which changes the CPM. Rather cyclical, isn’t it?

    — Gary summed everything up brilliantly when he said “We simultaneously value our miles at far less and far more than 2 cents.” Simply brilliant.

  11. Excellent points have been made above about the value of a mile/point. I agree about the somewhat flexible nature of that value, and I will generally continue to use my MP and *wood CCs, but I have still applied for this CC. Why? Psychologically, I don’t like the thought that I am paying more for a mile than I should when I use my CC abroad, and so I generally just use ATMs/cash. There are some places where that is very awkward, so being able to use a no foreign fee card that also provides an additional benefit in % cash back is highly appealing. Thanks for the heads up on this!

  12. I’d pick neither….use a card that accumulates its own internal points, and use the points to redeem for air ticket. then the rewards from the card itself spawn more rewards in terms of airline mileage accrual.

    Say you spend $150,000 which leads to 150,000 points (not counting any schemes that give you more than 1 pt per dollar), which can buy $1,500 worth of air tickets. A domestic transcon RT in USA is about $300. That buys 5 transcons, which leads to another domestic reward ticket worth $300.

    In essence, those points system is a hidden 20% bonus. A card (which shall remain un-named) gives you 5 pts per dollar on restaurants… that’s 6% rewards folks!

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