Credit Cards

Education of a Points Freak, Q1 – Is accumulating points and miles for everyone?

The Chase Sapphire Preferred is a great card with a great bonus, but don’t be too hasty to get into the points game unless it’s the right time

Everyone wants to feel like they are getting a great deal or travelling for next to nothing. That doesn’t mean, however, that becoming a “points freak” (as my wife calls me) is for everyone. Obviously, it’s not for people who don’t feel like bothering, but even amongst those who might be interested, it’s not always the wisest decision. So before one gets too far down the rabbit hole of miles and points, it’s important to ask – is accumulating miles and points for everyone?

The answer, like most answers in the miles and points game, is “it depends.” But there are definitely some criteria that I would recommend people meet before they consider going hard into the points game. This post isn’t as long as it looks, I included a lot of boring math at the end only if you’re interested.

Criteria 1 – You have the means to pay off your credit card balances monthly

This is probably the most important thing to consider when getting into the points game. One of the most lucrative ways to bank miles and points is through credit card sign up bonuses. If you do not have the means to pay off your balances, those sign up bonuses, while tempting, will hurt you in the long run by costing you way more money than the points are worth. I’ve included some boring math at the bottom of this post if you’re unconvinced or if you like boring math.

Aside from causing the points to cost more money than they are worth, not paying off your credit card balances is generally unwise fiscally. My general rule of thumb is, if I can’t afford to pay for a product in cash, then I can’t afford it period. The only two things I have ever made an exception for were my car and my house (and I’d make those exceptions again if the moment arises). It’s just my opinion, but my advice is, if you can’t pay off your credit card balances, be careful.

Criteria 2 – You enjoy travelling enough to make the time you need to invest worth your while

There is no way around it – staying on top of my miles and points game takes a lot of time and effort. I think of it as a hobby. If I redevoted all the time I spent reading blogs, perusing Flyertalk forums, or searching for award tickets to, say, writing, I probably could have written a novel in the last year. But I love travelling, and now that I’ve had a taste of premium cabin travel, I want more. So I’m perfectly happy to put in the time and effort needed to be a points freak.

But as life changes, maybe my time restrictions will change, and I’ll have to scale back. I like to think of travelling as a hobby, and my love of miles and points is an extension of that. If my wife and I get to the point where we can’t travel as much, then I’ll adjust my points hobby accordingly. I think it’s important before getting hardcore into the game just to decide for yourself whether it’s even worth your time.

Criteria 3 – You aren’t planning on any major loans in the NEAR future

Since a lot of points earning strategies revolve around credit card sign up bonuses, it’s important to consider the effect signing up for a bunch of new credit cards will have on your credit. When it comes to mortgages, generally you need a score about 740 to get the best rates, and depending on the lender I think you might be able to get even better rates if your score is 760+. Now, signing up for credit cards shouldn’t hurt your credit too much, which I’ll discuss in my next post in this series, but that doesn’t mean it won’t affect it at all.

Some people advise not applying for credit cards at all if you are planning on needing a major loan within the next two years (the logic being credit pulls fall off your credit report at that point). I wouldn’t be that stringent, but I definitely would be wary of applying for too much small credit if you know you need some BIG credit in the near future. Why risk it? Plus, if the big credit is something like a loan for your son or daughter’s college education, it’s even less worth the risk. The opportunity cost is way too great – a round trip business class ticket isn’t worth the money you’ll lose to interest on a major loan.

Criteria 4 – You feel that investment in the points and miles game is more valuable to you than cash back credit cards

It’s an age old question – are cash back credit cards or miles and points cards more valuable? You could actually further break down the debate into cash back cards (e.g., Discover More Card), fixed point cards (e.g., Citi ThankYou Premier Card), or transferable rewards cards (e.g., Chase Sapphire Preferred). I will probably do a whole post on this, but I’ll summarize here.

Essentially, cash back cards are easy money in the bank. You don’t have to think about them, and you will always receive 1% cash back. If you do a little bit of work, like click on a button to activate special spending categories, you may receive 5% back. But it takes very little work to get a return on your cash back card, and over time, those returns are very significant. For all intents and purposes, fixed point cards work the same way, except instead of getting the money back as cash, you can use the points to buy things like flights as if the points were cash.

Transferable rewards cards require more investment, both monetarily and time wise. Monetarily, the majority of transferable rewards cards have annual fees. In many cases these annual fees are waived for the first year, but after that, there is an inherent cost to keeping the card. The question you can ask yourself, though, is whether you are willing to put in the work it will take to maximize your return from transferable rewards cards. That will entail understanding where you can transfer your points to, keeping track of your various mileage balances, paying attention to meeting minimum spending requirements for bonuses, and a whole lot of other bookkeeping that doesn’t appeal to many people.

If you’re willing to do the bookkeeping, though, there is the potential to squeeze more value out of your points than you would out of straight cash. That’s because you can get more bang for your buck, so to speak, with transferable rewards cards. See below for the boring math on that one.

Final Thoughts

These criteria are the basics of what I think are important things to consider before getting into the miles and points game. Personally, I love it, which is why I’ve become a points freak. But if I ever decide to invest in a new piece of real estate, or if I lose my job and need to cut down spending, I would probably take a break from the points game. In the end, a few free flights are not worth the headaches spending beyond my means or getting a high interest rate on a house would create. I’m sure I’ve missed some other things to think about to, so feel free to sound off in the comments. And if you’re interested, I’ve included some boring math below. I’d highly recommend NOT reading if you are not interested, or if you want to check my math and tell me I’m wrong (I probably am!). I’ll start with the easier math, which is criteria 4. It’s the more interesting one too.

Boring Math for Criteria 4

People who are into points talk a lot about the valuation of their miles. For example, in the above example, those points are costing you 1.72 cents per point. How much value can you get out of them? It’s all in the eye of the beholder, but the bottom line is, if you can get more value out of your miles/points than 1 cent per point, you’re usually doing better than cash back.

Say I have 25,000 points on my Chase Freedom card, a regular cash back card that can also be used as a transferrable rewards card if you have Chase Ultimate Rewards (which would mean you’d have to have a Chase Sapphire Preferred or Ink card). If I redeem those for straight cash, I’ll get $250, or 1 cent per point.

If, however, I have a card that allows me to transfer those Freedom points to a Chase Ultimate Rewards partner like United Airlines, I could use it to fly from Boston to San Francisco, round trip. If an equivalent flight costs $300, then I’m getting 1.2 cents per point. But I can do better than that.

If I transfer those points to British Airways Avios, I could get a round trip coach ticket from Boston to Dublin for the same 25,000 points. I’d conservatively value that at $500 on average, which would net me 2 cents per point.

Of course, transferable rewards programs offer the MOST value when you redeem for business class awards, although the valuation gets fuzzy at that point because I would never pay a full business class fare. But using the Avios and Boston to Dublin again, I COULD fly one way in business class for the same 25,000 points. Even if I value that one way flight at $500, I’m still getting 2 cents per point – and at this point, I’m also getting a decent night’s sleep on the flight. I’d say that’s worth another $100 of value. So as you can see, if you’re willing to put the time and effort to find the right redemptions, you can pull a lot more value out of transferable rewards points – which is why I love them!

Boring Math for Criteria 1

Let’s assume I’m applying for a credit card with a 50,000 point sign up bonus that has an APR of 18%. The card requires that I spend $1000 in three months to receive the sign up bonus, and I want it really badly, even though I won’t be able to pay that off immediately. Instead I decide to make minimum payments of $20 until I pay off the balance. The way I see it, any interest that I pay is how much those 50,000 points will “cost” me.

So on to the boring math. For simplicity I assume the interest is calculated per month, and the monthly interest rate is 1.5% (giving an APR of 18%). You can use this equation to calculate loan balance:

B = A(1+i)^n − (P/i)[(1+i)^n − 1],
B = balance
A = original balance (principal, or $1000)
i = interest rate (monthly, or 0.01)
n = number of monthly payments
P = amount paid per repayment ($100)

If we set B to 0, we can calculate how many months it will take to pay off the balance and how much that will cost total. After setting B to 0,

A(1+i)^n = (P/i)[(1+i)^n – 1]

We can rearrange this to:

P = iA / [1-(1+i)^-n]

Solving for n,

1-(1+i)^-n = iA / P

(1+i)^-n = -iA / P + 1

ln (1+i)^-n = ln (1-iA/P)

-n ln (1+i) = ln (1-iA/P)

-n = ln (1-iA/P) / ln (1+i)

n = -ln (1-iA/P) / ln (1+i)

Plugging in our values,

n = – ln (1 – 0.015*1000/20) / ln (1+.015) = – ln (0.25) / ln (1.015) = about 93 months

So if you pay $20/month for 93 months, you end up paying about $1860 or $860 of interest. So 50,000 points cost you $860, or 1.72 cents per point. 50,000 points is enough for two round trip tickets from one coast of the US to another, but if you aren’t flying at peak times, you could probably do that for less than $860. At least you would break even. Moreover, running a balance will hurt your credit score. Plus, all this assumes you put nothing else on the credit card. Overall, it’s not worth the hassle or the money it costs to run a balance. Not in my opinion at least. Also, my head hurts from all this stupid math, and nobody is reading this at this point, so…bye!


Just an average joe trying to fly his family for less

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