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In this episode of MythBusters, we’ll take a look at the myriad stories of people claiming to travel for free using accumulated points and miles.
The headlines are inescapable. “How to Take a Free Vacation With Credit Card Rewards” and similar taglines draw you in, usually accompanied by a picture of a sandy beach, azure ocean, pale blue sky, and a few lovely palm trees. Bonus points if there’s a fit couple sipping cocktails from coconuts.
Heck, even I’m guilty of using similar phrasing. Credit Cards for Free Travel and Cash Back is a title I came up with years ago, but I’ve come to realize that at best, “free” is an oversimplification.
The fact is that points and miles don’t give you free travel. They give you an alternative way to extract some value from the charges you make on your credit card. You could have opted for cash or cash equivalents, but you opted for a travel experience instead. I applaud the decision, but that does not make it free!
First, some facts.
It’s true that most credit card companies reward their users by giving some percentage back to the cardholder when the card is used to pay for things. Rewards are usually in the 1% to 2% range, but can be higher in certain categories. The two cards I use most often get me a minimum of 2.25% back and up to 15% back depending on what I’m buying and how I redeem the points they give me.
It’s also a fact that when you open a new card, you’ll often get a much higher reward on your initial purchases in the first few months. For example, the Chase Sapphire Cards give you 60,000 points when you spend $4,000 in the first three months. Those points are worth $600 in cash back or $750 to $900 when used to book travel. That works out to 15% to 22.5% additional money back on your first $4,000 in purchases, as long as you make them within three months of opening the account.
The rewards do add up, especially if you pick up a valuable new card two or three times a year. These rewards can absolutely be used to book flights and hotels stays. With some cards, you can be reimbursed for anything considered to be in the “travel” category, like Airbnb stays, cruises, and travel agency charges (a clever way to get theme park tickets covered).
Since you’re racking up points and redeeming them for travel with little or no out of pocket costs, it’s easy to look at rewards travel as free travel. You’re not actually paying for it, right?
I’ve talked about how money is fungible, and the same is true of credit card rewards. Mental accounting has us fooling ourselves by assigning particular dollars to specific expenses, but that ignores the fungibility of money.
What we should be doing is comparing the “free” travel we got by using a credit card to what we could have had instead.
Businesses that accept credit cards pay a fee to the credit card issuers in the range of 2% to 4%. Let’s say it’s 3% on average. Businesses need to profit in order to stay in business long-term, so that cost of doing business is typically passed on to the consumer.
To encourage you to use your credit card, the card issuers incentivize you with rewards programs that, on average, give you about half of that 3% processing charge back.
Some businesses will give you a price break if you pay cash, saving them about 3% in credit card processing fees. Most businesses don’t offer a cash discount, but some do, like gas stations and our dentist and orthodontist.
If you scored your “free” travel by putting expenses on a credit card when you could have gotten a discount (which I’ve seen as high as 5%) by paying by cash or check, that’s obviously not free travel.
The Proper Comparison
So what could you have had instead of that flight to Krakow?
2% cash back.
That’s the comparison you need to make. You can have a single, no-annual fee credit card like the Citi Double Cash card and get 2% back on every purchase you make.
If you like travel perks, you can get 2% to 10% back on all purchases with the Capital One Venture X Rewards Credit Card, and you’ll also get unlimited Priority Pass Airport Lounge Access and Global Entry or TSA Pre✓ if you’re willing to pay an annual fee that’s mostly (or completely) offset by travel and anniversary credits.
With 2% back established as the baseline, that’s the bar that your “free” travel has to meet. Only when you’re getting value that exceeds 2% of your expenditures are you getting something for free.
A Professional Meeting
Let’s say I want to go to WCICon23. This is not a hypothetical, since I am going there, and you probably should, too. You can get a bunch of CME and learn lots about wellness, investing, and personal finance [more info].
The meeting is being held in Phoenix from March 1st to 4th, so for this example, I’ll plan to fly out the morning of the 1st and home on the 5th. I can transfer the points from my healthy Chase Ultimate Rewards balance 1:1 to United Airlines (or Southwest and others) and book a flight that way.
I can also use my points to get 1.5 cents per point when booking travel on the Expedia-powered Chase travel portal since I have the Chase Sapphire Reserve card.
Looking at my 2022 spending and rewards history, I can see that I’ve earned 59,217 points by spending $21,750 on the card, or just over 2.7 points per dollar spent. If I redeem those points for travel, I’m getting about 4% of my spending back in rewards, which is more than Chase is collecting from businesses for letting me use it!
Anyway, back to the Phoenix flight. I search to see what it would take to get me from Grand Rapids, MI (GRR) to Phoenix, AZ (PHX).
The most affordable flight that gets me there in time for the welcome reception Wednesday evening and allows me to enjoy Saturday evening with old and new friends before hopping in an Uber with a bit of a buzz to catch a redeye home would cost $463.30.
Let’s see what the same flight costs if I use miles.
Oddly, the lowest cost flight is not the lowest miles flight. The identical itinerary costs me 38,900 miles + $11.20 in fees. However, I can fly out at the same departure times with longer layovers for just 30,000 miles and the same $11.20 in fees.
If I were to book the cheapest cash-price flight on the Chase travel portal where my points are worth 50% more than a penny per point, I’d use 30,887 points to book it, which is a much better deal than taking cash at one penny per point ($308.87) which is another way to use your Chase UR points.
Finally, if I were to transfer my points to United and book directly with United using miles, they’ll want 30,000 to 38,900 miles and $11.20 in fees.
What’s the best option?
Clearly, the best option is to upgrade to business class, pay the “cash” price using a credit card, and use your CME fund to reimburse yourself.
For the sake of this exercise, however, we’ll assume you don’t have a CME fund or are taking a trip that wouldn’t qualify. In this case, booking on the Chase portal or transferring points to United are essentially equivalent options.
Was this flight free?
No! In addition to spending a little time to understand how to use the points and possibly transferring them out, you could have had $300 in cash instead by redeeming 30,000 UR points at a penny per point. You also could have used 30,000 points to book $450 worth of hotel stays or car rentals on the Chase Travel Portal.
You might have saved yourself $163.30 by using points instead of paying the cash price, but you have to consider alternative redemption options when figuring out what the “free” flight actually cost you. There is an opportunity cost to using your points for travel that must be taken into consideration.
Now, there are instances in which you can find much bigger discounts. For example, you might book an international flight in first class with points. If the round trip costs you 100,000 points but would have cost $4,000 in cash, you might consider that a $2,000 to $3,000 savings. But would you have ever considered paying $4,000 for the flight if you didn’t have the points to use?
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What About Welcome Bonuses?
As mentioned above, welcome bonuses can be juicy, and the rewards for the first $1,000 to $10,000 spent on a card might be rewarded with points and miles worth 10% to 25% of your initial spending on a new credit card.
You may be able to book some “free” hotel stays and flights with those rewards, and I’ve done it many times.
Once again, you must qualify the free-ness by looking at what you could have had in cash instead of the travel you booked. Some cards have flexible points that make it easy to compare, as is true of rewards programs from Chase, American Express, and Capital One.
Other co-branded cards may only reward you in points or miles that can only be redeemed in the rewards program of a specific hotel chain or airline. These are a bit tougher to compare, but you do have to consider that you could have had the welcome bonus from a cash back credit card instead, although they do tend to be smaller as compared to most travel rewards cards’ bonuses.
What About Annual Bonuses?
Some cards give you a little something to take the sting off of paying the annual fee, and you’ll get these annual bonuses every year on your cardmember anniversary (along with a charge for the annual fee).
For example, I have a Marriott Bonvoy card that gives me a “free” night’s stay every year in exchange for a $99 annual fee. I can book any room that goes for 35,000 Bonvoy points are less, and if I maximize this, I can usually find a room that would have cost $200 to $300 for the night.
I think of the card giving me a $100 to $200 discount on a hotel room one night each year.
The Capital One Venture X card gives cardmembers 10,000 bonus miles worth $100 each year and up to $300 in travel credit for travel booked on Capital One Travel. This is $400 in value that offsets the $395 annual fee, leaving you with $5 left over on a card that gives you airport lounge access and the equivalent of 2% or more back on all purchases.
It’s not free travel, but the annual fee is better than $0 as long as you take advantage of what Capital One gives you. It’s often the case that the annual bonuses equal or exceed the value fo the annual fee, but you must subtract the annual fee to determine the true value of the “freebies.”
As Compared to Spending Cash
This is where credit card reward travel starts to look free. If you’re using Dave Ramsey’s envelope system and spending nothing but paper legal tender (or writing checks) and not getting any sort of cash discount, then switching to responsible credit card usage can actually get you many things for free, including cash back or travel, that you were missing out on before.
To pay for those freebies, the card issuers not only charge a fee to businesses accepting cards, but also rely on millions of cardholders to not pay their balances in full each month, instead paying hefty interest charges to carry a balance.
Please don’t be one of those cardholders. Set up autopay, always pay your balance in full, and if you can’t reliably and consistently pay what you charge each month, cut up your credit cards and make a plan to get out of debt.
If you are a responsible credit card user, make sure you’re getting at least 2% back on every purchase. That should be the floor.
Cards Mentioned in This Post
A big reason that the ability to “travel for free” is promoted so prominently is that there is money to be made in the credit card referral game. Make no mistake; I play this game, too. I’m just trying to be a little more intellectually honest with myself and with you when discussing credit card rewards.
If you have learned anything from this post or this site in the past, I would be grateful if you chose to use links from this site to find your next credit card and start earning miles and points towards your next possibly-discounted trip!
Chase Sapphire Preferred® Card60,000 Points with a $4,000 spend in 3 months
The Chase Sapphire Preferred® Card is an excellent first (or only) rewards card. $50 annual hotel credit for bookings via the Chase UR tavel portal & 5x points for all travel via the portal. 3x points on dining, 2x on other travel. Flexible rewards good for cash, travel, or transfer to travel partners, great travel protection & new Peloton, Lyft & DoorDash perks! $95 Annual Fee
Chase Sapphire Reserve60,000 Points with a $4,000 spend in 3 months
The Chase Sapphire Reserve offers great travel perks including Priority Pass lounge access, a credit for Global Entry or TSA Pre✓ and a $300 annual travel credit. When using Chase Ultimate Rewards travel portal, get 10x points on hotels and car rental & 5x points on flights. 3x points on other travel & dining. Elevated Peloton, Lyft and DoorDash benefits. $550 Annual Fee
Citi Double Cash
The Citi Double Cash offers a flat 2% cash back on all purchases (1% when you buy, 1% when you pay). No welcome bonus. No annual fee.
Capital One Venture X Rewards Credit Card75,000 point bonus after spending $4,000 in the first 3 mo.
2 points per dollar spent (2% cash back equivalent). Up to $300 credit each year for travel booked on Capital One Travel, 10,000 bonus miles each account anniversary ($100 value). Unlimited Priority Pass Lounge Access, up to $100 Global Entry or TSA Pre✓ credit. $395 fee can be more than offset with travel credit & annual point bonus
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11 thoughts on “No, You Didn’t Travel for Free With Those Points and Miles”
I like the premise and love digging into the true cost of everything (including the cost of your time), but I think this post got a little muddled. Are you suggesting a basis of comparison, instead of 0%, is a cash discount or -1% cash back minus fee or 2% back with baked in transaction costs, etc.? Overusing “free” does negate the opportunity cost of the 2% back, which I think is your point. However, we don’t say our stocks returning 5% was actually 3% because we could have put them in a savings account for 2%. We weigh our options and choose the best one.
For me, the choice is either 1) put it all on one card at 2% or so, 2) track which card is good for what spend in one month for 3-5%, or 3) get a new card every few months and get a minimum of 16% (50,000 miles = $500 cash on $3,000 spend). Options 2 and 3 take about the same amount of work, so I choose 3.
That’s the gist. Among your choices, I primarily do #2 with a new card every once in a while.
You make a good point about opportunity cost. I just think calling travel “free” when you redeem for flights and hotel stays rather than cash is misleading, perhaps unintentionally.
For the last many years I’ve just been coasting by on my USAA 2.5% cash back on everything card. As of 1/1/23 it goes down to 1.5%, so now I need to figure out what card to use instead. Your post is quite timely. Thank you.
I’ve always been a straight cash back girl until recently when I decided I wanted a Southwest Companion pass and ventured into my first credit card travel hacking foray. I’m just about done the bonus spend on my first card and am agonizing over what to put on that card without going over the required spend. I have a property tax bill sitting beside me, it’s only $310 but would tip me over the bonus spend for this card, but the flip side is they charge a 2.83% convenience fee to process a credit card. So do I walk to the mailbox tomorrow morning and get it in the mail or pay the fee which after points earned will cost me $5.00. It’ll probably depend how cold it is outside in the morning.
Though I hate when I’m charged a fee to use a credit card, it makes all the sense in the world to me. I myself pass on the fee in my accounting practice.
Thanks for your honesty – only the clickbait credit card hawkers are advertising “free” travel. 😉
Those of us who are savvy know that travel rewards simply offset costs of experiences we otherwise wouldn’t or don’t want to pay for. I keep a spreadsheet of all my redemptions, so I know that my average redemption comes in at 5.8 cents per point. Since I always earn a base of 1.5-2x points on non-bonused spend, with bonuses spend ranging from 3-10x points per dollar, I’m getting a minimum return of 8.7-11.6% on every dollar. Could one argue that I’m getting a 6.7-9.6% return for free since that’s the spread minus cash back? Perhaps, as long as I don’t change my spending behavior to achieve this spread.
Bottom line – there’s lots that docs can leverage with travel rewards if that’s what we want. Make every dollar work to its max!
I will not pay cash for a business class upgrade. However, when traveling overseas, I love using points to upgrade. Usually, the “value “ is 6-10 cents per point. (After tax dollars)
Meh its not free but I will say that a very savy credit churner and point utilizer can get a lot more than 2% back. I spend $60-70K on credits cards every year. This year I have gotten approx. ~$8K of credit card freebies in 2022. When you add up sign up bonuses, status upgrades, price matching, other benefits you can crush 2% back. That is almost 10% back to me. But then again I enjoy figuring out the deals and I have been playing the game for 10+ years and have maybe signed up for 60+ credit cards in that timeframe. I will agree that most causal credit card users do not use points wisely. And for most physicians a $8K freebie a year isn’t going to change your financial picture.
Nice post. Absolutely not “free”, although admittedly can be nice to minimize cash flow outgo at various times. And every person also needs to monitor the risk that they overspend in pursuit of the points/miles, but that’s tough to measure. But I’ve definitely observed that behavior in various forums.
Another common marketing ploy used by the entire cottage industry of miles/points promoters is the inflated “cents per point” valuations for premium air travel redemptions. Often this will result from a $5,000 cash price business class ticket being offerred for 100,000 points or something like that. So the Level 1 analysis says, hey, each point is worth 5 cents! But it’s obviously not the case unless you actually would have paid $5,000 for a cash price ticket. If instead you would have bought a main cabin ticket for $1,000 and you value a cash-paid business class upgrade at $500 (e.g. if you were able to bid for it), then your redemption value was only 1.5 cents per point if you’re not interested in kidding yourself.
No doubt! You always have to compare your redemption to a reasonable alternative, and paying $5,000 for a flight is something that very few people — especially the people savvy enough to accumulate points and miles to save money — would actually do. The best comparison is a realistic alternative — like a $1,500 flight (or taking $1,000 in cash instead of the flight).
Also, excellent point on points accumulation driving unnecessary spending. Unless you’re only buying things you would have bought regardless of the method of payment, you’re not doing yourself any favors by chasing miles, points, and welcome bonuses.
Thanks for posting this. I like your threshold concept – if it’s not better than 2%, it’s effectively not worthwhile. I have another threshold as a 6-figure earner: if points don’t save me $100/hour more than cash back, I’m just doing cash back. I don’t want to use my precious free time playing games with credit card points.
I like your second rule.
Some people like the game and get a rise out of getting the optimal value for their points, but if you don’t enjoy it, simplicity is best.