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Sean Talks Credit: Get the Most Value From Your Credit Card Points and Miles

May 24, 2016
Credit Cards, Travel Credit Cards
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The value of your travel credit card’s points and miles may not be as cut and dried as you thought.

In fact, the value of credit card points can vary widely. A mile earned through an airline loyalty program could be worth as little as half a penny or as much as 3 cents, depending on which award flight you book. A point earned on your general travel credit card could be worth 1 cent when redeemed for travel, but half as much when redeemed for cash back. Your loyalty program won’t warn you against choosing a poor redemption option, so it’s up to you to grab the good options and avoid the lousy ones.

Your loyalty program may be complicated, but your approach to redeeming rewards doesn’t have to be. For me, identifying good deals quickly is a matter of knowing two key things:

1) How much the value of your rewards can fluctuate.

2) What a fair redemption value is.

As I’ve said before, I’m a lazy optimizer. For me, maximizing rewards isn’t all about getting the best deal possible — it’s about getting a good deal with the least amount of effort. Here’s what that means for travel cards that offer rewards with ever-changing values.

Fixed vs. fluctuating rewards

About 77% of Americans with rewards credit cards say that the dollar value of their rewards does not change once the rewards are earned, according to a recent NerdWallet survey. But in fact, that’s rarely the case with points and miles. These rewards can change, sometimes by a lot, based on how they’re redeemed. You could potentially double or triple the value of your rewards just by understanding how your loyalty program is set up.

Most rewards fall into one of two buckets. Some are pegged to the dollar, and each point or mile is worth a fixed number of cents when you redeem for travel and a different fixed amount when you redeem for something other than travel. Others are pegged to something besides the dollar, so they fluctuate more.

Generally, your rewards’ value will fluctuate more if your loyalty program comes with an award chart, or a table that designates tiered award prices for different types of flights and hotel stays. With these award-chart programs — usually found on cards co-branded with a certain airline or hotel loyalty program — what you pay in rewards for flights or hotel stays doesn’t always correspond directly with their cash prices. Consider:

  • United, American and Alaska airlines each set the award price for most standard round-trip domestic flights at 25,000 miles, regardless of how much tickets for those flights cost in cash.
  • At Hyatt, one night in a standard room at a Category 1 hotel, the least expensive option, costs 5,000 points. At Hilton, staying at a Category 1 hotel costs 7,500 points. Again, the award prices of these rooms aren’t tied directly to their cash value.

Booking the most valuable flight or hotel stay for the fewest points or miles possible is a winning strategy in these programs. Most standard round-trip domestic flights may cost 25,000 miles, but some might have a dollar price of just $125 while others could be worth $500. In this case, after you subtract taxes and fees, the first option would give you less than a penny per mile, while the second option might get almost 2 cents per mile.

Sometimes, the values of points and miles are (mostly) fixed. With some loyalty programs, including the ones at Southwest Airlines, JetBlue and Virgin America, award prices correspond with the dollar cost of tickets. I’ll call these dollar-based loyalty programs. In such a program, a $210 flight (not including taxes and fees) might cost 21,000 miles, while a $170 flight might cost 17,000 miles. You’d get 1 cent for each mile, regardless of whether you were booking a four-hour flight or a one-hour flight. Most general travel credit cards also come with fixed reward values.

But while these “fixed” redemption values are more predictable, they can also change depending on how you’re redeeming your rewards. On the Capital One® Venture® Rewards Credit Card, for example, 1 mile gets you 1 cent to put toward travel purchases. So you could use 20,000 miles to cover a $200 plane ticket. But if you redeem 20,000 miles for cash back on the card, you’d get only $100 back, a redemption value of 0.5 cents per mile.

Rewards in dollar-based programs can’t really be “maximized” like points and miles in award-chart programs, but you can stretch them further by booking less expensive flights and hotel stays and avoiding those less valuable redemption options.

To find out whether your card has an award-chart program or a dollar-based program, take a quick look at this chart. It tells you how each program works, along with best strategies for maximizing your rewards.

» MORE: 3 things you ought to know about credit card loyalty programs

Make sure you’re getting a fair deal

Knowing what drives the value of your points and miles can give you a basic idea of what to look for when redeeming them. But before you click “Book now” on your next award trip, be sure you’re getting a fair redemption value, regardless of how your card’s loyalty program is structured. Here’s how you can do that:

Calculate how much you’re getting per reward. Divide the cash price of whatever you’re buying, less taxes and fees, by the reward’s cost. For example, if you bought a United ticket that would have cost $625 with 25,000 miles, you’d divide $625 by 25,000, which gives you $0.025. You’d be getting 2.5 cents per mile.

Compare it with the average redemption rate. Check out this chart to find the average redemption value of your rewards. With the United example, you could compare the values and see that yours was better than average — a good deal.

This gut-check takes just a few seconds, but it’s important. If you find out that you’re getting a lower-than-average redemption value on your rewards, you can still look for a better redemption option or pay with a credit card instead of rewards. Using the average redemption rates as guidelines, you can make sure you get a better-than-average redemption value on every single points-and-miles purchase you make.

» MORE: NerdWallet’s best rewards credit cards

Make your loyalty program work for you

Maximizing credit card points and miles can become an all-consuming hobby, but it doesn’t have to be. No matter what type of credit card you have, some quick math can always help you figure out if you’re getting a good deal, whether you’re redeeming for travel statement credit, cash back, gift cards, merchandise or travel. And if you prefer rewards with more stable values, you can always switch to a travel statement credit card or, my personal favorite, a cash-back card.

Ultimately, getting more value out of your points-and-miles cards is a game. To get ahead, you don’t need to sacrifice all your nights and weekends — you just need a basic, lazy optimizer’s understanding of the rules. Your credit card’s loyalty program should work for you — not the other way around.