The following is a guest post by Craig Ford. He writes at Help me Travel Cheap where he teaches newbies how to turn credit card rewards into free travel. If after reading this post you're interested in points-based cards, there are two currently that are offering over $1,400 in bonuses combined. You can find details on them here.
I have a prediction to make. If you use credit cards, you want to maximize your credit card returns. There are not many folks I know who use credit cards and don't want some type of rewards card. We all want to think we're getting extra value for the dollars we spend.
When it comes to choosing a rewards card, one of the biggest decisions you'll need to make is deciding between a cash back credit card and a mileage based credit card. We all know FMF is a big fan of the cash back credit card (he talks about his strategy here). He's done a great job explaining why he is a fan of the cash back credit card. However, there is a case to be made that, for some people, mileage based credit cards may actually be more valuable.
The Best Card for You
First, let's clarify a misnomer. There is no one best credit card for everyone.
The point of this article is not to say FMF should be using a mileage based card. The point is that there are some circumstances where mileage based credit cards are better, and you'll want to properly evaluate your situation so you can make the right decision.
If you're a person who spends a lot of money on groceries (you may have 12 kids or you have a bunch of foster kids), a card like the Blue Cash Everyday from American Express which gives you 6% cash back on groceries would be great. If you're a person who spends a lot on dining out, you may find the best return comes from the Citi Forward card which gives 5% cash back on dining out. If you're a person who has family overseas that you visit every year, you'll find that the Chase Sapphire Preferred may be the best card for you. Most of those cards are available on this best cash back credit cards page.
There is no best credit card or credit card type. It all depends on how you spend your money and how you redeem your rewards. In this post, I'll explain why I'm a fan of mileage based credit cards.
The Case for Mileage Based Credit Cards
Mileage based credit cards have the potential to be more valuable than cash back credit cards. Yes, they do also have the potential to be less valuable if they remain in your account unused. I earn miles and frequently use them, so they are of tremendous value to me.
How can mileage based credit cards be more valuable than cash back credit cards?
Mileage based credit cards generally have much better sign up bonuses than cash back credit cards. Thus, when comparing the two different cards, you should incorporate the sign up bonus in your math. In my case, I'm not a very high spender, so even if there is some difference in the reward amount, it will take me a long time to make up the difference between a $625 value bonus and a $200 value bonus.
Let’s assume that you can get a cash back credit card that averages 2% cash back. Is it possible to use your miles for booking flights where you get more than a 2% value per mile? I think so.
Let me give a couple of examples of itineraries I've recently booked or reserved, as an example.*
*I've used itineraries I've booked or reserved in the last 12 months so that you can't just scoff and say 'well, that might be true in theory, but you can never find availability'. These are flights that I actually had on hold or actually booked, so they are/were indeed available to book.
Port Moresby, Papua New Guinea (POM) to Toronto, Ontario (YYZ)
There are five people in my family. I recently had a reservation on hold for all five of us to fly from POM to YYZ. The cost per person was 37,500 miles for the flight (one way). That was a total of 187,500 miles. The taxes and fees were going to be around $175 per person, so that would have been a total of $875.
Had we booked the cheapest itinerary with cash, we would have paid $1,800 per person. The total cost would have been $9,000. (I remember that the cheapest itinerary had more stops and a longer travel time than the itinerary using miles.)
That means the total value of each mile ($9,000-$875/187500) would have been 4.3 cents per mile. If I had a credit card that gave one mile per dollar spent, that would be like a 4.3% rate of return.
Phuket, Thailand to Toronto, Ontario
As you may have guessed, we decided not to take the flight above since we really wanted to go through Thailand on our way to Toronto.
Instead, we booked two one way tickets from Phuket to Toronto. Three tickets we booked with cash cost $1,000 each. The two that we booked with miles cost 35,000 miles and $75 each. (That includes phone booking fee of $25. I paid the phone booking fee because I wanted to get the exact same flights as the rest of the family who paid cash for tickets.) By booking those two tickets with miles, we saved $1,850.
The value per mile was 2.6 cents per mile, or a 2.6% rate of return.
This illustration also highlights a disadvantage of mileage based credit cards. Our whole family was able to get the same flight from Phuket to Korea and then on to Chicago. However, from Chicago to Toronto, my wife and a couple of the kids will leave two hours sooner than my son and I. If availability opens up on the flight, we can change it to the exact same itinerary.
This does serve to illustrate that you must have some flexibility.
Houston, TX to St. Sault Marie, Michigan
A few months ago I decided to take a last minute trip from Houston to The Soo. I had two options for purchasing tickets. I could have paid $225 and flown into Detroit. From there, I would have rented a car and drove 5 hours North to the Soo, stayed for two days, and then drove back. The other option was to fly into the Chippewa Airport. The only problem was flying right into Chippewa would have cost $900.
Instead, I used 25,000 Delta miles and $10.
The total value was 3.56 cents per mile or a 3.56% rate of return.
Of course, I could go on, but I think you get the drift. There are certainly occasions where you can get more value out of mileage based credit cards than cash cash back credit cards.
The Frustration with Mileage Based Credit Cards
I think people who are frustrated with mileage programs are disenchanted because of false expectations. If you want to collect air miles, you will need to be willing to invest some time to understand how they work. You must expect that, on occasion, there will be some hassle.
Yes, if you don't ever want to invest time in exchange for more value, then you'll likely be happier with cash back credit cards.
I know a ton of people who have the Delta SkyMiles credit card even though Delta is consistently reported one of the hardest airlines to get low mileage redemptions. This illustrates the tendency of individuals to start collecting miles without even the most basic understanding of mileage rewards programs. That's why some bloggers (like myself) help to educate readers on how to maximize the value of mileage based credit cards.
If you are trying to decide between a mileage based credit card or a cash back credit card, look at your spending habits and consider how you'd like to use your rewards. Both cash back cards and mileage cards are good, but you just need to decide which is best for you.
In my home, we're going to stick with the mileage based cards.
Totally agree with this. It's all about what works for you. Lucky for me, I fly out of EWR, LGA, JFK so I collect miles for United/Continental, Delta, AND American Airlines.
Also, I only redeem them on pricey routes similar to the ones you've outlined and also on premium cabins to foreign countries.
I just redeemed 2 Business Class tickets on Cathay Pacific (using British Airways miles from the big 100k bonus) to Manila via Hong Kong.
Retail price = $9500 each
Mileage cost = 100k each
Fees = $350 each
Rate of return = 9.15%
I'll take that + luxury travel any day!
Posted by: infamousdx | October 25, 2011 at 04:08 PM
The best deals are (as noted by infamousdx above) international business class tickets. They usually require approximately double the number of miles as economy tickets, but if paying cash would cost between 4 and 5 times the economy price.
Posted by: Mark | October 26, 2011 at 11:16 AM
Mileage based credit cards are heavily benefial for frequent flyers. They are just an amazing benefit to have.
Posted by: Vince Thorne | October 27, 2011 at 03:39 PM