I used to
be a 100% cash back credit card chaser as it is hassle free and cash is always
better than a captive currency like miles.
Recently, I
have been reading quite a bit on miles blogs. Apparently, there is strong
interest in chasing the miles to redeem for premium flights. But do they
actually make sense? The value per miles as advocated by some blogs is 1.9
cents per mile. Hence even paying 2% admin fees to buy miles make sense for
some.
I would
probably value it at no more than ~1.57 cents, which I will illustrate simply
below, base on my personal circumstance.
As I spend
3k per month, I usually split up 2k on UOB one card (5%) cash back and 1k on
OCBC 365 cash back card (averages 3.5% or so). For simplicity, the cash back I
get back is roughly $135 per month. This works out to be 4.5% blended spending cash
back.
If I were
to spend it on miles, I probably would apportion my spending on 3 cards: $1k UOB
Visa pay wave (4 miles), Maybank horizon (3.2 miles) $1k, miscellaneous $1k
spending on UOB privi miles card @ 1.4 miles/dollar earn rate. I can earn
approximately 8600 miles monthly.
Hence the
opportunity cost to earn the miles is to give up cash back of $135 which works
out to be 1.57 cents per miles. The true opportunity cost should be even higher
since cash is paid frequently to offset
bills and miles can expire (or even devalued).
The
attractive part of miles redemption is that business class tickets actually
cost roughly only 30%-70% of outright purchase price when redeemed using miles.
It is almost similar to earning a premium flight ticket discount coupon by
using miles card.
For
instance Sin-HCM-Sin business class ticket costs $1075 or 43k miles (opportunity
cost $675 cash back from spending. 37% discount on ticket).
Business
class ticket Sin-HK-Sin route costs $1800 but or 61,000 miles (opportunity cost
$958 cash back, 46% discount on ticket).
The further
the distance, the more value is derived from miles. Sin-Auk-Sin cost $5800 or
124,000 miles (opportunity cost $1947 cash back, 66.4% discount on ticket).
It is
actually uncomfortable for me to abandon cash back card altogether and earn
delay gratification on business class travel. However, given that I am unwilling
to pay for business class tickets, I would probably give miles cards a try.
Signs up
are probably much faster to earn then spending. Hence, I am likely keeping my
UOB one card for the 5% cash back but earning miles sign up bonuses to kick
start the discounted business class travels.
Hence I
applied for the SCB X card 100k miles for a start. That actually costs me $700
annual fee + $300 opportunity cost of using 5% cash back card = 1k. Hence my
miles cost me 1 cent/mile.
In summary,
it means that miles should be valued base on the cash back you give up (opportunity
costs) and not on the advertised rates on blogs (base on the cost of business
class travel – you wouldn’t spend cash on the tickets anyway).
Redeem
miles on business class travel make some sense otherwise just stick to cash
back cards to earn the cash and pay for economy class tickets.
It is
possible to stick to 1 card for cash back (eg if spending is around $900/mth
stick to OCBC/Citi cash back; $2,000/mth stick to UOB one card).
For miles
chasers, a lot more planning is required on which card to use in order to
stretch the miles rate.
You shouldn’t
accumulate miles on your own and your partner should preferably share your
obsession in chasing miles.
A hybrid
approach will stretch your dollars more; using miles card that earn 3.2-4 miles
per dollar targeted spend; general spending to earn 3%-5% cash back is
preferred over 1.4-1.5 general spending miles.
It makes
life a bit more fun, brains a lot more thinking to use a miles card!
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