Why our behavior isn’t totally rational…. but kind of is

Right now American is offering 15,000 bonus miles if you purchase 40,000 miles. At the normal purchase rate of 2.5 cents per mile, along with the $30 transaction fee, that means you can get 55,000 miles for $1,030. Certainly not a bad deal at under 1.9 cents per mile, though I’m betting hardly any of you took advantage of this offer. As a matter of fact, I’m betting that with very few exceptions, only people that were looking to “top off” an account for an award took advantage of this offer.

That brings me to this very interesting FlyerTalk post. The basic argument is that we’re basically “paying” more than that per mile every time we use a credit card, yet we don’t think twice about it. As I’ve mentioned many times before, Charles Schwab offers a 2% cash back credit card without an annual fee. So that means that in theory, all of us using our American AAdvantage Citi credit cards should instead use the Charles Schwab 2% cash back credit card and outright buy the miles. But to many of us, miles from credit cards seem a bit like Monopoly money. When I buy something for $10 and use a cash back credit card, I get 20 cents. What’s 20 cents, really? A fifth of the way to a 500 calorie donut? When I use a mileage earning credit card, I get 10 miles. What’s ten miles? Well, probably nothing, but it could be those last ten miles towards a Cathay Pacific first class award. Hell, sometimes I don’t feel guilty when I buy something just because I know I’m earning miles. At the same time, if I got 2% cash back, I doubt I’d feel as “ok” about it, since I’m only earning back a tiny bit of what I spent.

Of course those of using a Starwood American Express card can do slightly better than the two cents per mile above, most likely, though there are still better options. Unless we have an unlimited amount of money, we’d probably be best off just using the Charles Schwab 2% cash back card and saving that money for great mileage offers, like the recent US Airways holiday promotion where you could essentially buy miles for 0.7 cents each. At that rate I could earn nearly three miles for every dollar spent, something you can’t get with any other credit card.

Unfortunately I doubt I’ll be changing my behavior, as much as I should.

Filed Under: Advice
  1. The penalty for using a loyalty card is even higher with international transactions (1% to 3% depending on the card).

    I keep a Capital One card solely for international travel as they’re one of the few cards that doesn’t charge any such fee.

  2. Remember that many purchases on “miles” cards earn bonus miles. You may get double or even triple miles which brings your cost per mile way down.

  3. it’s interesting how our brains work. i was flying home from NYC once and i met a guy who was trying to integrate game and competition concepts into residential power demand reduction — the idea being that you’d use less power if there was a game where you could compete with your neighbors for who used less.

    my friend Gabe Zichermann just wrote a book about it, called Game Based Marketing. his site is at gamebasedmarketing (dot) (com).

  4. I don’t know. Starwood points are worth about 2 points a mile, and that’s my “backup” card, but as a not-big-spender (maybe $1000 a month on CC), I have no problem structuring it so that all my CC spending involves acquiring sign-up bonuses. I thought that was what everyone else did!

  5. Not only that, but most cash back cards don’t have an annual fee; the fee makes many mileage cards cash negative unless your spend gets high enough.

    For example, the AA card has a $75 annual fee. Assuming a valuation of 2 cents a mile (generous), you aren’t even in the black until you’ve done $3,500 in spend. To catch up to a 1% cash back card, you’ve got to spend over $7,500 on the card.

    Now, assume that the cash back card gets 2% and you value miles at 1.5 cents each. The math of it is really bleak for the airline card. That’s why I never keep an airline/hotel card for more than 9 months. Sign up, get the bonus miles, then toss after the point at which they won’t take back the miles.

  6. Similar to this, KLM is offering ‘Buy Award Miles between 15 March and 30 April 2010 and receive a 30% bonus’

    eg 40000 + 12000 bonus for 1000 euros.

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