In this post, I described how I choose to value redemptions relative to how difficult they would be to earn with a cash back card. I wanted to go into pretty fine detail, since I often see people argue that if an annual fee is X and a cash back card pays Y, then every redemption has to be at least Z pennies per point or you’re losing money. And most of the time that people make this argument, they do so in the context of travel rewards cards ultimately being less lucrative than cash back cards. My goal, therefore, was to test whether this idea that cash back cards are usually better is true for me by creating a calculator that would help me value each individual redemption.
However, since I wrote that post, two additional points came to mind that I wanted to address. First is the issue of “forfeited cash,” which is cash that I’d get from using a cash back card if I never took trips and instead put it in my investment account. Clearly the most frugal strategy would be to use cash back cards exclusively and invest the money, since even the most wildly valuable redemption wouldn’t outperform 2% of all credit card spend invested in dividend-paying stocks over a 40 year period. However, I do kind of want to see the world before I retire, so that option is out. Still, I should at least account for the cash that I’m forfeiting by using a travel rewards card when I value redemptions. This is difficult, however, since it’s really tough to pin down points per dollar that I earn. (And that figure is necessary, since I’d use it to determine the amount of credit card spend I needed in order to earn enough points for the reward.) First of all, it changes every month, and second, most redemptions are made using a combination of points from different programs, plus points I earned “for free” (AKA through a shopping portal or some other method not mutually exclusive with using a cash back card). So, I can ballpark it, but it’s incredibly difficult to know for sure. Overall, I view it as one of the costs of trying to redeem points for premium travel that I couldn’t afford with cash, although it doesn’t ultimately factor into my valuation of an individual award redemption.
Fuel surcharges, on the other hand, are tricky to account for. I’ve gone back and forth on this, trying to figure out where to account for them. Here’s where I get hung up: fuel surcharges are paid on a revenue ticket or an award ticket (assuming the carrier doesn’t waive them on the award ticket), so right off the bat, it seems like they’d be equivalent costs. However, in reality most people don’t redeem fixed value points just for the fare portion of a ticket; since the airline bundles all the fees together, the flexible points award uses enough flexible points to cover the total price. In my calculator, I identify the “net value for comparison,” which includes the equivalent costs, but not the non-equivalent costs. My thinking was that it’s an apples-to-oranges comparison if you’re looking at the amount of fixed value points required to pay for an entire ticket, since only the award redeemed with miles would have a cash component as well. This is open to debate, though, since you *can* pay for fuel surcharges with fixed value points, but you can’t with flexible points.
I played around with the calculator a little bit to run some different scenarios to see which produced better data. Here are two scenarios:
This is a fairly simple hypothetical redemption, with the only difference being whether the $500 fuel surcharge goes into equivalent or non-equivalent costs. The net value per point is the same, since that value takes into account all costs. However, putting the fuel surcharge into non-equivalent costs distorts the point-per-dollar rate required metric in an undesirable way. Since non-equivalent costs don’t deduct from the net value for comparison, the fixed value redemption is for a higher amount. And, if the net spending required amount goes up, the points per dollar rate goes down (because each dollar can earn fewer points if there are more total dollars to spend in order to reach a fixed number of points). So, after looking at it this way, it becomes clear that fuel surcharges should be accounted for as equivalent costs, since doing so has no effect on the net value per point metric and it presents a more accurate picture of whether the points-per-dollar rate of the travel rewards card is actually beating the cash back card.
Requisite question designed to spur a flurry of responses in the comments section: Do YOU give a shit about any of this?