Over time from talking to people about credit cards, I’ve learned there are two general approaches people take towards credit card rewards.
The first approach is that credit card rewards earn miles and points that allow one to have experiences they couldn’t otherwise afford to have. This is the thought process I subscribe to, because as you can see from my trip report index, I’ve probably taken at least a million dollars worth of flights if I were to pay retail, while I end up paying next to nothing. Let’s keep in mind that international first class tickets typically retail for $20,000+, so it’s not too tough for the amounts to add up quickly. Just take a look at the retail cost of my recent trip to Tokyo:
I used 120,000 miles for a trip that would have retailed for $22,000+. Would I ever pay that much? Of course not. Though it was an awesome experience that I still value quite a bit.
Then there’s the psychology behind earning miles on a credit card. If I go to Starbucks and use my Chase Sapphire Preferred® Card (hey, double points!) I’m 15 miles closer to my next international first class ticket. I can taste the Diet Coke with lemon and macadamia nuts in Lufthansa first class already (and the caviar, begrudgingly). 😉
If I had used a credit card that earns me cash back (let’s say 2%), that would be 15 cents. How many of those do I need for an international first class ticket? Besides, if I wanted to save 15 cents I wouldn’t have gone to Starbucks in the first place!
The other approach to take is that credit cards are a great way to earn cash back on purchases you’d make anyway. That’s a perfectly legitimate approach to take, in my opinion, since a lot of people would (understandably) rather earn cash back for their purchases than miles towards an award redemption. Besides, if you have a big family and don’t want to travel in an international premium cabin, your rewards might just add up faster if you use the cash back you earn towards coach tickets as opposed to using miles.
Okay, are we all on the same page so far? Because here’s where I get confused.
A lot of people will accrue miles/points through rewards credit cards and redeem their points towards a revenue ticket/hotel stay.
For example, one Ultimate Rewards point earned through the Chase Sapphire Preferred® Card and Ink Business Preferred® Credit Card can either be transferred to United, British Airways, Southwest, Hyatt, Marriott, or IHG, OR be redeemed at a rate of 1.25 cents towards the cost of travel.
For example, someone will use 40,000 points towards a $500 ticket, and say it’s a good value because they’re earning back 10,000 miles because it’s a revenue ticket and not an award. It’s easy to convince oneself that it’s a good value, given that you’re “only” paying 30,000 points for $500 worth of travel (since you earn back 10,000 points, indirectly). But that doesn’t really hold up, since the alternative would have been to spend the cash. And if the alternative would have been to spend cash, then you’re probably best off just getting a cash back credit card.
So I don’t want to make a blanket statement and say that it never makes sense to redeem a points currency for cash towards travel, because for some people it can make sense. This is especially true if someone is signing up for a credit card just for the sign-up bonus. So if you earn 100,000 Ultimate Rewards points with the Chase Sapphire Preferred® Card and Ink Business Preferred® Credit Card, you could redeem that for $1,250 worth of travel. If it were me, I’d rather redeem those points for a Virgin Atlantic Upper Class ticket to Europe, though everyone is different. Even the $1,250 of “cash” towards travel is well worth it for two new credit cards.
But for actual everyday spend on credit cards (as opposed to the initial sign-up bonus), you’re almost always better off with a cash back credit card as opposed to a points earning credit card with the option of “paying with points,” assuming your goal is to apply points towards the cost of travel.
Make sense? Agree/Disagree?