Points (and miles) are simply a currency, used to "pay" for goods and services like any other currency. The complexity arises in determining exactly what that value is. Like inflation hurts the buying power of the dollar, credit card and travel companies often also devalue their currency over time. In this post I hope to set a framework for establishing roughly how to evaluate your points so that you can use them in a strategic way to maximize their value.
Understanding the value of points and when or where to use them or not is simply math. Let's start with a benchmark. Credit cards and programs that allow you to use your points as cash back have a fixed value associated with them. Whether you cash in those points as a check, statement credit, gift cards, etc doesn't matter, you are getting a fixed value for your points. Some examples of cash back are:
Chase Ultimate Rewards- 1 cent/point
Capital One- .5-1 cent/mile
Amex Membership Rewards- .5-1 cent/mile
These are just a few examples, but when we are talking about a starting point for valuing points, 1 cent/point should be the floor you consider. That is because the majority of cash back credit cards out there allow you to redeem your points at that value. Let's start with a cash back scenario:
Say you spend $100 and that earns you 100 points. If you use that as a statement credit at .01/point for $1 cash back, you’ve earned 1% back on your spend. If you spend that $100 in a bonus category with a card that offers, say 3x points on gas, you have now spent $100 to earn 300 points and $3 (or 3%) cash back. I have more on the power of points multipliers in my post here.
The allure in using points not for fixed cash back but for travel is that the value can far outweigh that 1 cent/point floor. The next progressive step would be looking at fixed redemption rates higher than .01/point. For example, Chase cardholders can use their points to book travel through the Chase travel portal at the following rates:
Chase Sapphire Preferred cardholders- 1.25 cents/point
Chase Sapphire Reserve cardholders- 1.50 cents/point
So for holders of those cards, these rates would be the base minimum value of their points.
Next, points used directly with airlines or hotels do not have a fixed value. The value you get will solely be dependent on how much you save based on getting a free flight or stay from the use of your points. The equation you will always use to determine the value you receive is:
Having said that, miles have values that have been attached to them by various websites that can give you a general idea of their value. Travel sites take a lot of factors into consideration when valuing points. Some examples are:
United- 1.3 cents/mile
American- 1.6 cents
Delta- 1.4 cents
Amex Membership Rewards- 2 cents/point
Chase Ultimate Rewards- 2 cents
Marriott- .8 cents
Hyatt- 1.7 cents
These are just estimates, not guarantees. And although they are subjective, they do provide great guidance when assessing whether or not to use points for travel. Here are two ways using estimated values can help you.
When weighing using points for cash back verses using them for travel, you can see the difference. From our above example, the same $100 that became 100 points, if used at Hyatt, based on the (estimated) valuation above would yield you $1.70 instead of $1 in the cash back scenario. You have now earned almost double the value from your points verses cash back.
The goal is to never spend more in points than you would if just paying cash for the same flight/hotel.
If you have 50000 United miles at an estimated 1.3 cents/mile, they are (generally) worth 50000 x .013= $650. So if they same 50K point flight would cost you $400, you would obviously pay cash rather than use 50000 points.
Conversely, if you book a Hyatt room that costs $850/night but only 25000 WOH points, it would yield ($850/25000= .034) 3.4 cents/point value. This is well above the estimated value of 1.7 cents/Hyatt point and much higher than the 1 cent/point cash back alternative.
Conclusion
You can now see that the redemption possibilities when using points directly with airlines and hotels can far outweigh the less valuable alternatives. Now, the beauty of earning points in transferrable currencies is the flexibility they provide to maximize the value you can get from those points. The reasoning is, if I earn points only with United, I can only use them with United and their partners, so there are limitations. But if I earn points with Chase Ultimate Rewards and can transfer them to United OR a bunch of other partners, I have options for finding the best value.
Practically speaking, the value you get or desire to get is up to you. You need to weigh what is important to your spending and travel needs and use points to achieve those goals. Whereas one person might hoard their points to use for business class flights overseas for 4-9 cents/point value, another may just love saving money flying their family on Southwest at around 1.4 cents/point.
Regardless, you always want to be thinking about your travel and points in terms of value. How many cents/point am I getting for various uses? This may require weighing different options for flights and hotels if you have a specific trip in mind in order to see where the best value lies. And if the least I can earn is 1 cent/point, anything below that is a bad redemption and anything above gets better and better.
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