Buyer Beware When Frequent Flyer Miles Are on Sale

How much would you pay for frequent flyer miles?

You don’t often hear that question because in most cases there’s no extra charge to earn airline miles. Or, more accurately, the cost of the miles is folded into an item’s price as one of many marketing expenses companies incur in selling their goods and services.

But there are several cases where miles are available à la carte for an additional fee. When those extra fees are factored into the equation, earning miles is no longer a no-brainer.

Credit card miles, for a price

Consider, for example, a newly launched online service, Cardit.com, which makes it possible for homeowners to use their credit cards to make mortgage payments.

The business is based on a marketplace disconnect. On the one hand, most major mortgage companies do not accept credit cards for payment. On the other hand, many homeowners want to charge their mortgage payments to a credit card, either to manage their finances or to earn frequent flyer miles by using a program-affiliated card.

Cardit addresses that need by serving as an intermediary—accepting credit card payments from homeowners and paying the mortgage company by check or wire transfer. Consumers can earn frequent flyer miles by charging payments to their credit cards, and the mortgage companies receive the full payment amounts, without incurring the merchant fees charged by credit card issuers.

It’s almost a win-win situation, but not quite. That merchant fee doesn’t disappear—it is simply shifted from the mortgage company to Cardit, which passes it along to cardholders in the form of a “convenience fee.” The fee also includes a margin of profit for Cardit. In total, homeowners will pay $19.99 plus an extra 2.49 percent of the payment amount for the privilege of using a credit card to discharge their mortgage obligations.

The proposition is much the same in a different corner of the consumer universe. Like mortgage lenders, the IRS does not accept credit card payments directly from taxpayers. But some taxpayers wish to use their credit cards to pay their tax bills.

To plug that gap, two companies, Official Payments and Link2Gov, do for taxpayers what Cardit does for homeowners. They facilitate credit card payments where such charges would otherwise not be permitted.

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Taxpayers who elect to charge their tax payments to a credit card in order to rack up miles will pay a price for doing so. Both companies impose a convenience fee of 2.49 percent of the amount charged for federal income tax payments. Since one mile is earned for every dollar in payments, that amounts to buying the miles for 2.49 cents each.

The airlines sell miles, too

Yet another purveyor of miles-for-a-price is the airline industry itself.

For example, American and United sell miles at prices ranging between 2.5 and 2.75 cents per mile, depending on the quantity purchased, plus $30 and $35 processing fees respectively. Delta miles can be purchased for 2.75 cents each. When taxes are factored in, the actual per-mile price is closer to three cents.

It’s worth noting that the airlines limit the number of miles that consumers may purchase. Members of Delta’s program can buy a maximum of 30,000 miles per year; American members are limited to 40,000 miles; and at United the annual maximum is 60,000 miles. Although the airlines would be loathe to admit it, implicit in those caps is a warning to consumers that buying miles may not be the best possible use of funds.

The bottom line on buying miles

So, does it make financial sense to buy miles at these prices? Here’s the math.

If you were to buy enough miles for a free domestic coach award ticket—25,000 miles in most programs—at 2.5 cents each, the price of the ticket would be $625. That’s substantially more than the average price of a comparable ticket purchased on the open market. In addition, the paid ticket would be largely free of the capacity controls and other restrictions associated with award tickets.

There may, however, be a case to be made for buying miles in small quantities. Some consumers buy miles sparingly, purchasing 1,000 miles for $25, say, to increase an account balance just short of an award threshold. In such cases, the cost may live up to its billing as a convenience fee.

But the general rule on buying miles is a decidedly cautionary one: The more miles are purchased, the more likely it is that the resulting costs will add up to a sucker’s fee.