Guide to Credit Cards: Why Air Miles Rewards Are Generally a Lousy Deal
Air miles credit cards are popular because many people believe that air miles are worth more than cash-back per dollar of spending.
Let's look at the numbers. Air miles credit cards generally grant one air mile per dollar of spending. Cash-back credit cards generally award at least $0.01 per dollar of spending (1%), and sometimes up to $0.05 (5%) on certain purchases. So the key question is: How much is an air mile worth?
The value of an air mile varies greatly depending on what it's used for. You can easily find a return coach ticket for the busy JFK-LAX long-haul route, for example, that cost $220. Purchasing that ticket for 25,000 air miles means that each air mile is worth less than a penny (0.88 cents, to be exact). In contrast, if you use 90,000 air miles to purchase a business class ticket to Europe that would normally cost $6,000, you're getting over 6 cents of value for each air mile.
There's a pattern to this. Air miles are worth more when used to purchase business and first class tickets on expensive routes. This is true also of upgrades from coach to business or first class, and is particularly true of international routes with limited competition.
But it's a mistake to think that the value of air miles is determined entirely by the actual cost of the tickets you can purchase with them. Free flights or upgrades are worth less to you than the ticket price. This is a crucial point. Even if you cash in your air miles for a flight that would have cost $6,000, it's not worth that to you if you never would have chosen to buy that ticket with cash.
A "free" coach ticket is a great bonus, but if you wouldn't have made the trip at all had you been paying cash, it's actually worth less to you than the advertised ticket price. And if you would have taken a trip and are using air miles to get a business class ticket, you can calculate the value to you of the ticket: Find the cheapest coach ticket, and then add to its price however much you would be willing to pay cash for an upgrade to business class. Chances are it's far less than the advertised price of the business class ticket.
And there are further reasons why the value of an air mile is actually far less than suggested by simply dividing the cost of an expensive ticket by the number of air miles it "costs":
1 Most air miles go unclaimed for years. Industry estimates on this vary. Some estimate that 75% of air miles are never redeemed, while others estimate that 50% of air miles go unclaimed for at least 5 years. Either way, a reward is valueless if you don't use it. Even if you do finally use your airmiles, all the time they sit unused they fail to deliver value to you. In contrast, cash-back is usable immediately to increase your savings, expenditure or debt repayment.
2 Booking fees can reduce the value of the air miles. There are often fees for booking tickets using your air miles rewards. Those fees reduce the value of the air miles, as you end up paying more for your flights or upgrades than you expected.
3 Restrictions significantly reduce the value of the air miles. (a) Air miles programs often have severe date and route restrictions. (b) Air miles aren't usable for child fares. Remember that you'll only want to use air miles for leisure trips, not as a business expense. Well, if your leisure trip includes travelling with children, booking the tickets becomes much harder. You have to book the adult tickets with air miles, then try to book adjacent seats on the same flight through some other booking service. Not easy. (c) Many budget airlines, such as Jet Blue, don't accept air miles, and instead have their own frequent flier programs or no program at all. The budget airlines tend to be the most efficient airlines, and they're gaining market share. So you might find that the most convenient flight for you doesn't accept your air miles.
4 Air miles lose value as fares get cheaper. The price of air travel is steadily declining in real (inflation adjusted) terms. Continental Airlines CEO Gordon Bethune puts it this way: "As the low-cost carriers continue to expand, I think you'll see continuous evolutions of the fare structure". Translation: the low cost carriers are driving down ticket prices for everyone. Continental, for example, cut the price of flexible coach and first-class tickets to stimulate more business travel. That means that air miles are becoming less valuable each year as the price of air tickets falls.
5 Air miles rewards can lock you into a credit card for longer than you would have chosen. The time it takes to build up a balance of air miles large enough to use can tie you to a single credit card for a long period, preventing you from switching to a credit card that offers better rewards.
6 Booking a ticket with air miles is often less convenient and more time consuming than booking online. Travel websites have improved the ticket-booking experience to the point where you can find, price and purchase a ticket rapidly and conveniently. Using airmiles to find a non-restricted flight can be more of a hassle.
When you take all these factors into account, the value of an air mile is likely worth less than a penny to most people, and possibly considerably less. True, major U.S. airlines sell up to 15,000 air miles to members of their freqent flier programs for between 2.5 and 2.75 cents. But remember that if you are purchasing air miles in that way, you probably want to use them immediately. And the purchase probably allows you to use a block of accumulated air miles that would otherwise be useless to you. So the cost to the airlines of selling "top up" air miles is far higher than the cost of giving them as general rewards.
For these reasons, credit cards that provide air miles rewards are generally a lousy deal for most people. Sure, if you build up rewards rapidly, and travel internationally for personal leisure without children and would normally choose to pay for a business class ticket, then an air miles credit card could be your best option.
But most credit card users don't make international leisure trips without children for which they would be happy to pay cash for business or first class tickets. In that case, you'd do better shopping around for the best cash-back credit card. That's what we'll look at next.
Comments
THANKS, THIS MAKES A LOT OF SENSE.
Well I think that Air Miles are especially wonderful because we got this cute booklet with all these things you can buy with Air Miles. I calculated all the prices of everything in that booklet together, and it comes to about 45,000. We currently have 48,000 Air Miles, so we can get anything, or everything, we want in that booklet!
Yeah I love them too. Air Miles, if you take a lot of trips and save the Miles up, can be very useful and surprisingly pleasant when you want to buy something like an iPod.
I agree with both this article and the last two comments; I think Air Miles are not great with trips especially when you need to go on a business trip, bring children, etc. However, the small rewards (like iPods) are very worth your "while and mile."
Exactly what I wanted to know. The arguments confirm my experience: I have accumulated 75,000 points with an airmiles provider some 7 years ago and have not been able to use them yet.