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Goodbye frequent flyer miles, hello cash back?

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Goodbye frequent flyer miles, hello cash back?

Posted by George Hobica on Monday, July 07, 2008

Remember S&H Green Stamps?


I sure do. I remember helping my Aunt Freda paste them into books and then trade them in for toasters and clock radios and the like. The company is a shadow of its former self, but still exists, sort of, in the guise of S&H Greenpoints.

The American public’s fascination with Green Stamps started to wane in the 1980s, and turned instead to frequent flyer miles and points.

One big difference: you could always spend your Green Stamps as soon as you had enough to buy something. But “spending” frequent flyer points is getting harder, and may get harder still.

The airlines do hand out hundreds of thousands of so-called “free” seats each year, it’s true. But if you’re earning frequent flyer miles with an airline-affiliated credit card, chances are you’re paying a hefty annual fee to the credit card company. And now there are new fees for cashing in frequent flyer miles and the old ones have been jacked up.
You’ll pay up to $100 for some frequent flyer credit cards annually, and over at Delta and US Air you’ll pay up to $50 for cashing in miles (I’d be surprised if other airlines don’t add this fee), not to mention a penalty of up to $100 if you cash in those miles at short notice, and another $50 to $100 should you decide not to use your ticket (a “redeposit fee”). Oh, and there’s a fee of up to $30 should you need to speak to an airline representative during the transaction. See chart.
 
True, airline credit cards do hand out generous sign up bonuses (20,000 miles is typical) to snare you.

And true, some frequent flyer awards are good value if the price you’d pay to buy the ticket is exorbitant (such as a first class international roundtrip that might cost $15,000 but can be had for 150,000 miles).

But if you’re like most people and you cash in your 25,000 miles for domestic flights costing $300, $400, $500, or even $600 round-trip, then miles earned with frequent flyer credit cards may just not be worth the hassle any longer.

Instead, let’s look at $25,000 spent in various categories on what are arguably the two best cash back rewards cards available: The American Express Blue Cash and Chase Freedom cards, both of which have no annual fee. The Amex card pays 5% back on groceries, gas station purchases, and pharmacies, and an industry leading 1.5% on everything else; the Chase card pays 3% back on whatever your top three (of a possible 15) spending categories are in a given month, and then 1% on everything else, plus a bonus $50 back with your first purchase (much better than paying $50 to cash in frequent miles).

As you can see from the chart below a typical family could easily earn almost $700 with the Amex card in a year, or around $450 with the Chase, assuming a spend of $100 a week on groceries, $3000 a year on gas, $1000 annually on drugstore/pharmacy purchases., and the rest of the $25,000 on other categories.

$25000 spent on a frequent flyer credit card vs. a cash back card


  Grocery Gas Drugstore All other purchases

Annual Fee

 

Fee to obtain ticket Total cashback (totalmiles plus cash cost of "free" domestic flight)
The Spend $5200 $3000 $1000 $16,800      
American Express Blue Cash (5% on groceries, gas, pharmacy; 1.5% on everything else after you spend $6500 annually) $260 $150 $50 $252  $0 $0  $712
Chase Freedom
(3% back on your top three of 15 possible spending categories)
$156  $90  $30  $168  $0  $0  $444
Airline credit card (miles earned)  5200  3000  1000  16,800  up to $100  up to $50 (25,000  plus $150 in fees)


Clearly, if you spend more on gas and groceries than what we’ve allowed for, then the Amex card might be an even better idea,.

The nice thing about cash is that no airline is going to tell you that your cash isn’t good here anymore, as they might with miles (ever try to use frequent flyer miles to Hawaii? Hah!).

And Chase and Amex aren’t going to go bankrupt; your airline may and there go your frequent flyer miles (just ask all those folks who had miles on Aloha Airlines).

There are no capacity controls on cash.

There are no fees spending your cash on an airline fare.

There are no annual fees for your credit card.

And for $500 or $700, you can buy yourself a pretty fine airline ticket, even an international one, or even one to Maui.

Spend 25,000 miles, in contrast, and to obtain and use those miles you’ve already paid up to $150 in credit card fees and booking fees, so the cash earned from a no-fee cash back card looks even better.

Oh, sure, I know I’ll be hearing from all you mileage junkies out there, and to repeat, there are tickets for which miles make sense, such as international business and first class. But if you’re like the vast majority of Americans who don’t even own a passport and sit in the back of the plane, listen up: frequent flyer miles, like my Aunt Freda’s beloved green stamps, aren’t what they used to be. Take the cash instead.

Categories: Airline Industry News

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American Express has changed their benefits since this was written in 2008.
by gat069 on Friday, April 10, 2009
I want to caution people considering a switch to American Exp Blue Cash. On a recent trip to Florida , I found that one third of the businesses refused to accept the Amex card because of the high processing fee that they charge. Just this past week , I tried to use the card in Vail Colorado four times and two of the businesses would not accept it for the same reason. Also, for the first 60 days, Amex limits you to a $3000 credit limit. Just some things to consider before you jump.

Mad Dog

by Mad Dog on Tuesday, March 17, 2009
I just checked out the Chase Freedom card and they switched from 3% back to 1% back.
by Joanne on Wednesday, March 11, 2009
I think the Chase Freedom card is pretty good. I pay the balance every month to aviod the usurious rates they charge.
I used USAir points to book 1st class to Japan - 120K miles vs. about $10K. It was a hassle because US does not fly to Japan, so I had to go through the Star Alliance and fly UA. It took me weeks of calling a few times every day to finally get the flights and dates I wanted. And they only hold the rez for 3 days, so you have to make one small change on the 3rd day (or get a sympathetic agent to override) to "reset" the clock. It was well worth it for the long flight.
I have also been successful upgrading UA flights to Japan - 15K miles will upgrade a Y-class coach to business. That is worth it even if you have to buy the miles (still cheaper than upgrading to E-Plus)

by jake on Wednesday, December 24, 2008
We used 50,000 DL miles each to fly to Budapest and back from Munich this year, with a stopover in Paris. Going in high season-Aug. 2-Sept. 11. Tickets would have been close to $2K each.
by Longhorns on Tuesday, December 23, 2008
We live in a small town and fly out of a small airport, giving us a choice of basically three major carriers, and few deals. A flight to almost anywhere is at least $400 these days, so flying with miles is quite a savings over the cash back. When you only fly one airline (not really by choice) and can pool CC miles with actual miles things add up pretty fast. We don't pay intrest, or an annual fee, so it really is free!
by CB in MT on Friday, September 19, 2008
Thanks "Uncle Joe". I recalculated based on the 0.5% for all other below $6500 and 1.5% for all other above $6500 and the expected reward rises to $560.24
by Daz on Friday, August 01, 2008
The Amex Blue Cash card only pays 0.5% to 1% on the first $6,500 spent each year.
by Uncle Joe on Friday, August 01, 2008
I have a couple of questions with your math. $25,000 divided among $5200 for groceries, $3000 on gas and $1000 at drugstores leaves $15800 not $16800.

The American Express cash card only rewards 5% after spending $6500 in a year. Prior to that, the reward is 1%. $25000 over 12 months is $2083.33 per month and it takes 3.12 months earning 1% to get to the $6500 after which points for groceries, gas and drugstores earn 5%.

By my math and your numbers, I estimate an annual reward of $522.32 which, although still good, is well short of the $712 you calculate.

I believe the Chase Freedom Card rewards are also capped at $300 a year.

by Daz on Friday, August 01, 2008
To correct a comment by "Win" on 31 July: we do have cash-back cards in Canada! I've used one for years (CIBC Dividend), it has no fee and pays back 1% cash on all purchases (just before Christmas!). Cash is King! (Good site, BTW)
by akboily on Friday, August 01, 2008
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