One thing I get asked about most often by newbies is how I decide when to redeem miles and when to pay for travel. After all, points and miles are precious. Whether you’re earning them from credit card sign-up bonuses or via manufactured spending, you’re giving up something (credit score drop, cash, time) in return for these miles. The last thing you want to do is waste them. That same sentiment applies to cash. You work for a living and if you’re a responsible adult, you want to spend you earnings wisely. So how do you decide when to redeem miles and when to actually pay for your travel expenses? It depends entirely on how you’re earning them.
How Much is a Mile Worth?
Before I got involved in this hobby, I knew nothing about how much a mile was worth. I remember shopping for airline credit cards and throwing in the towel when it became too frustrating. After all, what could I actually do with 25,000 Alaska miles and was that better than 90,000 Hilton points?
I began researching award charts and figured out that 25,000 Alaska miles would get me a roundtrip ticket to any place in the U.S. At the time, I was a college student flying back and forth between the Bay Area and Los Angeles. It didn’t seem worthwhile for me to get the Bank of America Alaska card and redeem the sign-up bonus for a short-haul flight that was going to cost me $90 cash. Besides, I wasn’t going to spend enough (and thus earn enough miles) to justify paying the $95 annual fee. So I dropped the pursuit of airline credit cards, not revising the subject again until four years later.
There are two important lessons to be derived from this: 1.) The value of points and miles depends on your travel needs and how you redeem them. 2.) Always have a travel plan in mind before you decide which rewards credit card to get.
Redeeming Miles Based on Cash Value
A lot of people value their miles based on a specific value (i.e. American AAdvantage miles after often valued at ~1.5 cents each). These values are completely arbitrary but generally indicate a minimum value that is to be derived from them. At 1.5 cents each, the 60,000 point sign-up bonus from the Citi Platinum AAdvantage Card is valued at $900. Thus, people who assign set values to their airline miles will want to get at least $900 worth of value out of their AAdvantage award redemptions. Assigning a cash value to miles is an easy way to determine when to redeem miles and when to pay for travel instead. However, it may not be the best way to decide if you’re earning miles other than through paid travel and credit card sign-up bonuses….
Redeeming Miles Based on (Manufactured) Spending
Aside from assessing travel needs and comparing point redemption rates, a great way to determine when to redeem miles vs. pay cash for travel is by calculating the expenses involved in earning earning them. For example, I earn most of my miles via manufactured spending. When I’m determining whether to use miles or cash for a trip, I usually compare how much I would have to spend to earn those miles. Before my Barclay Arrival Plus card shut-down, I often compared airline and hotel credit card earnings with those from the Barclay Arrival Plus card.
Let’s say you’ve got your eye on a Hilton hotel that goes for $500 per night or 95,000 points. The Hilton Honors Reserve card earns 3 miles per $1 spent on everything. So it would take $31,667 worth of spending to generate enough points for that hotel night. Meanwhile, it would take just $25,000 worth of spending on a credit card that earns 2% cash back. So clearly, paying cash makes more sense than redeeming points in this instance. But again, that only applies if you’re earning your points based on spending (manufactured or otherwise) rather than credit card sign-up bonuses.
Ultimately, miles don’t have a value until you redeem them. So spend them wisely.
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