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I know that seems like a pretty straightforward question. For example, the Barclaycard Arrival® Plus World Elite Mastercard® is arguably the best cash back travel rewards card, as it accrues two miles per dollar spent, plus a 5% refund when you redeem miles. Each mile is worth a cent. So you’re getting a return of ~2.1% on spend… or are you?
This is a discussion I started having with reader Mike by email last week, after American Express announced that as of July 1, 2015, they’re adding a 30% rebate to their “Pay With Points” option on The Business Platinum® Card from American Express OPEN. Each point ordinarily gets you 1.0 cent per point towards the cost of airfare, so with a 30% rebate that’s the equivalent of ~1.43 cents per point towards the cost of airfare.
That’s not a horrible value, though ultimately I’d still rather convert miles to one of American Express’ airline transfer partners than redeem them for ~1.43 cents each.
Which is where the conversation started. Mike’s argument was basically that you’re getting a lot more value per point than that, since you also earn miles on those tickets. Which is true, since American Express is basically “buying” that ticket for you in exchange for your points.
But oddly I don’t include the miles earned into the value of cash back rewards, and now I can’t decide if I’ve been doing it wrong all along.
In other words, remember that $450 American Beijing business class mistake fare? Say theoretically you booked that using American Express Membership Rewards points through the “Pay With Points” option.
On The Platinum Card® from American Express you can redeem each point for 1.25 cents towards the cost of a ticket. So a $450 ticket would have cost 36,000 Membership Rewards points. As an Executive Platinum member I earn about 50,000 American AAdvantage miles for the roundtrip.
So does that make this a great redemption, since I would actually profit a net of 14,000 miles without spending a dime? I’d argue no.
Why? Because the alternative was paying $450 and having both 36,000 Membership Rewards points and 50,000 American AAdvantage miles. And the way I see it, you still only got 1.25 cents of value per Membership Rewards point, since you could have replaced those 36,000 points with $450 and gotten the same results.
But I guess I figured out where Mike and I differ.
I place a value on points, and am not afraid to pay for travel in cash if it’s the better value. In other words, say there’s a hotel I really want to stay at and it’s $300 per night or 20,000 Starpoints. Do I like paying $300 for a one night hotel stay? Nope. But I hate redeeming Starpoints at a rate of 1.5 cents each even more.
Similarly, do I like paying for revenue airline tickets when I have millions of miles to redeem? No. But if my return is only 1.25 cents per Membership Rewards point and I can otherwise afford to pay for the ticket in cash, I’m not going to redeem sub-optimally just so I can say my trip was “free.”
Admittedly everyone will have a different opinion on this, and it probably depends on the relative size of your accounts (frequent flyer accounts and bank accounts).
So, where do you stand? Do you value cash back rewards like Mike does (by factoring in the rewards you’d get from paying for the ticket), or like I do (by deriving your valuation exclusively from the cash opportunity cost)?