No, You Didn’t Travel for Free With Those Points and Miles

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!

The Premise

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?

The Problem

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 card and get 2% back on every purchase you make.

If you like travel perks, you can get 2 miles to 10 miles 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 miles 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).

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?

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.