Overview
The world of points and miles is often marketed as a way to travel for free, and to an extent, it is. But when someone tells you they flew business class for $50, it’s vital to remember the points that allowed them to do so came from somewhere, and they’ve often made some mistakes along the way.
The hidden cost of miles should be the first lesson we all learn. But typically, myself included, we learn retroactively after making bad calls, accruing a little (or a lot) of debt, or blowing points on a terrible redemption. Without fully grasping the acquisition cost of points, it’s impossible to have a fully bulletproof strategy. So let’s take a look at all the areas where your costs are eating into those “free” flights, and how you can tighten things up and put money back in your pocket.
The Acquisition Cost of Points
We earn points in several different ways, from credit card bonuses and everyday spending, to shopping incentives and points-buy schemes. Once they’re in our accounts, they feel like free money, but everything you’ve earned has an acquisition cost that factors into the value you get out. Being honest about how you earned those points is important, both to keep you financially secure and to be as effective as possible when it comes to redeeming points.
Welcome bonuses and everyday spend
Welcome bonuses are notorious for gamifying your expenses. When a bank says, “we’ll give you 100,000 miles if you spend $5,000 in three months”, we quickly shift into competition mode. The opportunity cost of earning 100,000 points can sometimes override the obvious fact that spending more than you usually do erodes value.
In the $5,000 example above, if you never spend that amount in a three-month period and force outgoings by eating out more, going on a shopping spree, or covering things for people, the value of the 100,000 points has gone down. If you can squeeze $2,000 in value from those 100,000 points, but you spend $1,000 extra to earn them, you didn’t get $2,000 in value — you got $1,000.
Debt accrual
The other side of forced spending is the potential debt you’ll incur. If you’re not paying your balance off every month, regardless of whether you’re spending more than you would or not, you’re incurring interest. Every single month that ticks by with a balance is stripping your points of their potential value. It’s easy to forget about this; once they’re earned, they feel separate. But their value is as linked to your debt and spending as it is to the airlines that set redemption values.
Buying points
Buying points is a risky business. It’s one of the clearest ways to see how fickle the game can be, and it’s not something that should be done without serious planning. For example, if you wanted to buy SkyMiles from Delta, you’d do so for 3.5 cents each. So 20,000 miles would set you back $700. This is a horrible rate, and you’d need to find a redemption worth more than 4 cents per mile to even come up a little ahead. If there’s a huge bonus on buying, it’s a little easier to find value, but don’t be lured in when rates are this bad.
Annual fees
Annual fees are easily forgotten, but they shouldn’t be. If you view earning points as a value-earning game, these ensure you’re already starting in the negative. If you’re paying $795 for a premium card, that means you need to ensure you’re getting at least $800 in value from the card before any of that “free” travel becomes free travel. The worst part of it is that it never feels like it’s a true cost. You don’t swipe your card; you don’t think about spending it — it’s just in your account one day, and it can put a serious hole in your value without you realizing.
Opportunity cost
Generally speaking, you have two options for rewards: cash back or points. Cash is simple and has a fixed value; you know what you’re getting. A 2% cashback rate means you get $40 back on $2,000 of spending. Points are more complex. The same 2x points per dollar rate gets you 4,000 points, which could be $40 on the travel portal, $80 with a good transfer partner, or $30 for a bad purchase on a pair of headphones. You can make a bad call or let your points expire, and see the opportunity cost of just using cashback disintegrate. Points require you to be active and thoughtful about how you use them. A lack of intention blows your value.
Big redemption blinders
Redeeming your points for a huge business class seat is an amazing experience. But it’s often just that — an experience. If you’re not in a financial position to ever spend $8,000 on a flight, that redemption isn’t saving you $8,000. It’s saving you whatever the cost of an economy ticket was. Opting to use points for experiential purposes — which isn’t wrong, by the way; it’s a valid way to use them — isn’t a savings decision, and it’s important to remember that. If your goal is to save money using points, you need to look at the bigger picture. That single business class redemption prevents you from redeeming four, five, or even more economy flights that truly save you money. You could barely pay cash for a flight again if you keep your points ticking over and fly economy. But blowing them on a business class flight leaves you footing the bill for every flight after.
Worst Case Scenario?
Imagine a worst-case scenario, that combines these factors. You open a card with a $795 annual fee and an intro bonus of 100,000 points, earned by spending $8,000 in six months. You force $1,000 worth of spending to hit the bonus and pay around $300 in interest on the debt you accrued.
Starting point: – $795 – $1,000 in extra spending – $300 in interest payments
You’re already down $2,095
You earn 100,000 points, redeem them all on a business class flight worth $8,000, and pay $300 in taxes and fees. That gets you 7.7 cents per point.
In theory, the bonus has put you $5,605 up (-$2,095 + $7,700). This feels good.
But you would never have paid for an $8,000 flight. An economy seat on the same flight only costs $450. So your direct savings are only $150 (when including the $300 in fees). But again, it’s still not a saving because you’ve spent so much to get that flight.
Worse yet, the points needed to book the economy flight were only 15,000 points plus $5.60 in fees, getting you almost 3 cents per point. The 100,000-point bonus could have grabbed you six of the economy flights, giving you $2,700 worth of flights for $33.60 in fees, taking you back up to a positive saving of $571.40, even with your extra spending, interest, and high annual fee.
If you could have earned the bonus sensibly without forcing spending or paying interest, you’d be up $1,871.40.
In short, there is a potential cost at almost every level of this process.
Imagine a worst-case scenario, that combines these factors. You open a card with a $795 annual fee and an intro bonus of 100,000 points, earned by spending $8,000 in six months. You force $1,000 worth of spending to hit the bonus and pay around $300 in interest on the debt you accrued.
Starting point: – $795 – $1,000 in extra spending – $300 in interest payments
You’re already down $2,095
You earn 100,000 points, redeem them all on a business class flight worth $8,000, and pay $300 in taxes and fees. That gets you 7.7 cents per point.
In theory, the bonus has put you $5,605 up (-$2,095 + $7,700). This feels good.
But you would never have paid for an $8,000 flight. An economy seat on the same flight only costs $450. So your direct savings are only $150 (when including the $300 in fees). But again, it’s still not a saving because you’ve spent so much to get that flight.
Worse yet, the points needed to book the economy flight were only 15,000 points plus $5.60 in fees, getting you almost 3 cents per point. The 100,000-point bonus could have grabbed you six of the economy flights, giving you $2,700 worth of flights for $33.60 in fees, taking you back up to a positive saving of $571.40, even with your extra spending, interest, and high annual fee.
If you could have earned the bonus sensibly without forcing spending or paying interest, you’d be up $1,871.40.
In short, there is a potential cost at almost every level of this process.
The Point
Points are a phenomenal way to save money on travel. But there are many hidden pitfalls that can strip your points of value and leave you with less cash in your account. It’s vital to remain structured and disciplined when opening cards and earning points, as you can quickly find yourself scrambling to break even.
