Credit Cards

How To Think About The Value of Points & Miles

Figuring out the value of a credit card rewards program isn’t easy. It helps to approach the problem from a simplified approach that involves monetary and utilitarian value. We break down how to do this to help you pick your next rewards credit card more optimally.

Consumers searching for a new rewards credit card are often faced with an overwhelming number of choices. Picking among several options can seem extremely difficult without the proper approach. One high-level way to discern between rewards programs is to look at their value. To do this, individuals need to consider two factors influencing this metric – monetary value and utility.

Monetary Value: How Much Can Your Points Buy?

Monetary value is the buying power your credit card points or miles have. This can be hard or easy to calculate -- it all depends on the bank and brand you're dealing with. In the best-case scenario, the program may have a direct point-to-dollar conversion rate. For example, they may tell you 2,500 points can be redeemed for $25 credit towards a flight. In such a case, your points will always be worth $0.01. You can get this by dividing $25 by 2,500.

Unfortunately, most reward programs today are a little trickier to deal with. They make redemptions vary on a case-by-case basis. Take, for example, American Airlines. A refundable round-trip flight from New York City to Los Angeles can cost between $364 and $671 for Economy Choice seating. In miles, that works out to somewhere between 42.5k and 50k. That means, depending on how you redeem, the value of your miles can be as low as $0.008 or as high as $0.013.

What should you do if your reward program has inconsistent point/mile values? The best approach is to look at redemptions you’re likely to actually use. For example, look at flights to the west coast, if you fly there a lot. Collect a few sample itineraries and their price -- both in miles and dollars. Once you have that data, calculate the average and use that to compare against other programs.

Utility: What Can Your Points Buy?

The other core concept involved with rewards programs is utility. This refers to how likely you are to actually use the points you collect, and whether you want to. For example, Credit Card A, affiliated with Hotels A, may give you the highest monetary value of any other offer on the market. However, if you don't like to stay with Hotel A, its utility suffers.

Before committing to a single reward program, take an inventory of all the possible redemption options and their value. Together, this information can help you arrive at a more holistic view of the program. For example, Chase’s Ultimate Rewards offers some cardholders to transfer their points to participating airline and hotel programs. Other programs, such as US Bank’s Flexperks, only allow you to use points to book future travel, without the ability to transfer. While Ultimate Rewards might be worth slightly less per-point, some consumers may find more value in the ability to transfer their points. It’s important to take such considerations into account.

How should you weigh monetary value against utility? It's not an easy feat. The challenge comes from the fact that there is no direct answer or guide – it all comes down to your own personal taste. Some individuals are willing to put up with small inconveniences, if it means better returns. Others may want only want to invest in points that are hassle-free. No article can predict your personal preference when it comes to this. However, as long as you’re aware of the two value components, you can pick between any reward programs you encounter in the future.

Joe Resendiz

Joe Resendiz is a former investment banking analyst for Goldman Sachs, where he covered public sector and infrastructure financing. During his time on Wall Street, Joe worked closely with the debt capital markets team, which allowed him to gain unique insights into the credit market. Joe is currently a research analyst who covers credit cards and the payments industry. He earned a bachelor’s degree from the University of Texas at Austin, where he majored in finance.

These responses are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser's responsibility to ensure all posts and/or questions are answered.

Advertiser Disclosure: The products that appear on this site may be from companies from which ValuePenguin receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). ValuePenguin does not include all financial institutions or all products offered available in the marketplace.

How We Calculate Rewards: ValuePenguin calculates the value of rewards by estimating the dollar value of any points, miles or bonuses earned using the card less any associated annual fees. These estimates here are ValuePenguin's alone, not those of the card issuer, and have not been reviewed, approved or otherwise endorsed by the credit card issuer.

Example of how we calculate the rewards rates: When redeemed for travel through Ultimate Rewards, Chase Sapphire Preferred points are worth $0.0125 each. The card awards 2 points on travel and dining and 1 point on everything else. Therefore, we say the card has a 2.5% rewards rate on dining and travel (2 x $0.0125) and a 1.25% rewards rate on everything else (1 x $0.0125).

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