The Allure of Credit Card Awards

Do you want to pay $52.36 for something worth $35.21? Today I will show you how people do it all the time, and they do it under the guise of a “reward”…

Chances are if you have a credit card you have some type of “rewards” or “points” card. I mean, why go in debt if you are not rewarded for the pain? One of the most iconic cards I see around town is the Southwest VISA. After some recent conversations surrounding the topic of “rewards” I started wondering if folks truly know how to value “points” as they relate to airline miles. Do you know what it may cost you in real money to accrue the “points” in your account?

Fly High…

Today on Southwest’s website I see a $132 fare from Nashville to Dallas that can be purchased using 7,610 points. Using very simple math you can easily determine the points are worth about 1.7 cents each. If I spend one dollar, Southwest will give me 1.7 cents toward a ticket on their airline. Think of it as a 1.7% “cash back” program but I can only use that “cash” to buy plane tickets. 

It’s worth noting this is slightly worse than the venerable 2% cash back offers I see all the time. At least Discover will send me a check for 2 cents on the dollar that I spend. I can spend that 2 cents on anything I want, versus the 1.7 cents from Southwest that I must use on a plane ticket. I digress… I’m trying to get to Dallas…

picture of Dallas

Now that I know what the points are worth let’s go spending! A lot of times when I hear someone talking about a big ticket item I hear them talking about “points” or “miles”. For many it’s like a sedative that soothes the sting of a large purchase hitting their account. They feel “rewarded” for the large expenditure, maybe even feeling like they got one over on someone by getting a “free airplane ticket” in exchange for spending a lot of money. Sometimes they qualify the purchase even further as money they were going to spend anyway. “I might as well get the points for it, right?” Or “well at least I’ll get the miles for the purchase.” Ahh… the allure…

Points? Or Cash?

I have a big ticket purchase I need to make soon – I need to pay my property taxes. I looked online and I owe $2,030 and the payment is due in February. Side note, for those not in Tennessee, our property taxes really are that cheap! Most folks will auto-default to thinking in terms of “points” or “air miles” when they see a large bill coming due. Well, let’s see if it would be worth it to pay my property taxes using a Southwest Visa. Will it get me a ticket to Big D?

If I pay online using a credit card the clerk’s office will charge me a $52.36 processing fee (that’s roughly a standard 2.6% fee to use a credit card online for a purchase). Now… simple math here… If 7,610 points get me a ticket worth $132, 2,030 points will get me a ticket worth???  $35.21!! Is it worth paying $52.36 in credit card fees for $35.21 worth of airplane ticket? NO! Then why do people do it ALL THE TIME? Because they’re seduced by the credit pimp, that’s why. Remember that allure? 

Alternatively I can pay via e-check where I enter the ACH routing and account numbers from my checking account. Do that and I only get dinged $1.50 to pay online. That is a far better option as it would cost me more than $1.50 of gas + time to go stand in line and pay it person. If I want to go old-school I can write a check and use a stamp that costs about 50 cents. Now we’re talking! That’s an extra buck I can spend in Dallas!

Even Uncle Sam?

The IRS will charge a 1.9% fee to pay your tax bill online using a credit card, making that a lose/lose propositions for the 1.7% worth of airline points you will see deposited into your Southwest account. Still, people do it all the time and think they are winning. The average fee added to an online payment using a credit card is around 2%, making these types of purchases losing propositions against the accrual of airline miles. 

Math in Real Life…

Take it closer to home and consider you need a new HVAC unit. The contractor hands you quote of $8,000 but says he’ll knock 200 bucks off the price if you pay with cash or check. Think quickly – do you rock the Southwest Visa or go hunting for your checkbook? $8,000 x 1.7% = $136 worth of miles at Southwest versus the $200 your air conditioning man is offering to knock off the bill. No-brainer right? Sign the check for $7,800! You’ll get to Dallas cheaper that way!

Travel Hacking

Now don’t get me wrong, I’ve read the “travel-hacking” websites and I know not every purchase is hit with a 2.6% processing fee – especially if you are running around town armed with your rewards card and hitting the mall, Costco, and Top Golf on a regular basis. I also know there are several “bonuses” and “tiers” you can hit where your rewards might be doubled or tripled along the way. All of these simply encourage you to spend more and to spend at certain locations where you may not be getting the best possible price.

Millionaire Status

The fact is, having read and studied investing & personal finance for years, I have yet to see anyone who can credit their wealth building strategy to the fact they learned how to win the game of credit card points. Not only will you pay a yearly fee that will eat into your rewards, but you are inclined to spend more when your brain is satiated by the idea it is being rewarded by spending. This leads to over-spending.

My suggestion – don’t fall for the trap. Use a debit card or cash and send me a picture of some good Texas bbq!


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