Airline miles versus bank miles

Despite the fact that so much has been written about the various species of frequent flyer miles, some travelers still aren’t sure about miles they earn with credit cards. Specifically, they aren’t sure whether to select a card that gives miles in an airline program or one that awards points in its own program. One reader recently asked, for example, “Is Capital One’s points program any more effective than the frequent flier miles with a major airline?”

The short answer is that there’s no single “yes or no” answer to that or similar questions; what’s “effective” for one traveler is often useless to another.

Airline miles are best when:

• You earn a substantial numbers of miles by flying. Then, you can combine the miles you earn through your credit card with the miles you earn by flying. That way you can build your total more quickly than if your flying miles and purchase miles are split into two separate accounts.
• You use them to fly in business or first class, either with “free” tickets or with upgrades. Within the 48 contiguous states (and a few points in Canada and the Caribbean), for example, the big lines all charge 25,000 miles for an award round-trip in coach or 50,000 miles in first or business class, but you can upgrade many coach tickets for 10,000 miles each way. The premium to fly in a comfortable seat is far less with airline miles than when you’re paying, and you can’t buy upgrades at all.

Keep in mind, however, that availability of “free” seats and upgrades at the standard mileage prices ranges from difficult to impossible.

Bank miles are best when you earn most of your miles through your credit card. The reason is simple. When you accumulate enough points to buy a ticket, the bank buys you a ticket, with no worries about limits on frequent flyer seats, and no limits on which airline and schedule best suits your trip.

Keep in mind, however, that if you want to fly in a comfortable seat, bank miles are close to worthless. You (or the bank) can often buy a long-haul coach ticket for, say, $300 round-trip, but a first class seat on that same route would cost four to five times as much, and maybe even more.

For those of you who are interested, here is additional background information on miles and points.

Airline miles

Airline miles came first. Initially, you earned them only by flying on the sponsor airline or its partners. All of the big lines followed American’s lead in structuring their programs. You earned miles by flying, with bonuses for business and first class, and used those miles for “free” trips or upgrades. The objective was to build “loyalty” to the sponsor line by offering incentives to use its flights as often as you could.

The big change came when airlines started selling miles to other companies that used them to attract or retain customers for products and services that had little or nothing to do with travel. Although all sorts of companies bought miles from the airlines, credit card issuers were among the first to do so in a big way—and, apparently, they still buy far more miles than any other non-airline outfits. Each big airline formed an alliance with a major cared-issuing bank, and the cards generally paid one frequent flyer mile for every dollar charged to the card.

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About the time credit card issuers (and others) started buying huge volumes of miles, the airlines’ primary objective morphed from building loyalty to generating profits. As a result, the airlines lavished us with more miles than ever, but made it virtually impossible to find any “free” seats without paying double to triple the base-level mileages. Recent surveys show—as you might expect—the “loyalty” part of the programs is wearing thin with more and more travelers. Despite weakening on the benefit side, however, airline miles retain some key advantages over bank miles, as noted above.

To help ease the pain of nonexistant award seats, some of the big lines have started to let you use their miles for other travel services and even for merchandise. In most cases, however, the “exchange rate” you get for your miles is pretty low.

Bank miles

Noting the decreased value of the airline programs, several banks decided to run their own programs, not tied to any single airline. As our reader indicated, Capital One is one of the biggest players in that market.

The best way to look at bank miles is as a cash rebate—similar to the cash rebates you get with Discover and some other non-airline cards. If you choose to use that rebate for an air ticket, fine, but most programs let you use it for many other purchases, too.

The one thing you can’t do, however, is combine those miles with the ones you earn by flying. They’re two separate accounts and will remain separate no matter what.

Lots of bank cards offer bank-miles programs. Check a site such as IndexCreditCards.com for cards with attractive combinations of rewards, rates, and charges. Overall, Capital One is a favorite of travelers because it has a reasonably good exchange rate (points to dollars) and does not surcharge overseas purchase transactions, but other programs have advantages, too.

Both worlds

American Express and Diners Club give you some of both worlds. Early on, they cut deals that allowed users to dump accumulated credit-card points into airline mileage programs for a bunch of different airlines. The number of airlines participating in those two programs has eroded a bit over the years, but either card can still put points into 20 or more different airline programs.

But you can also use AmEx and Diners Club points to buy tickets, other travel services, or even get cash, at a fairly standard exchange rate. They also offer merchandise exchanges, but the prices in “points” are pretty high compared with what you can get with cash.

United’s new program also allows both uses, as well, but its exchange rate of miles to non-airline purchases is worse than most banks’ programs.