Mile-earning credit cards: Friend or foe?

A few years back, some financial writer declared that frequent flyer points were the world’s second-largest currency after the US dollar. Whether you believe that or not (I’m skeptical), lots of people do hold lots of points. And they earn those miles not just by flying but also by using their credit cards. So it’s no surprise that some of those people are wondering just how valuable their accumulations really are.

One reader, for example, recently asked, “We have accumulated quite a few American Express points and we are curious to know the true value of those points when it comes time to exchange them. Is this valuation disclosed somewhere?” Here are some factors to consider when you’re trying to figure out that value of those AmEx (and other) points.

Benchmark value: Cash

The cash value of AmEx Membership Rewards credit is 0.5 cents per point. According to the AmEx website, you can use your points to pay AmEx bills at that exchange rate. Never use your points in any way that nets you a lower value. On all the airline programs I know, the cash value of miles is stated to be zero, and you have to acknowledge this valuation when you enroll. I’m reasonably certain that’s to avoid potential lawsuits over “lost” miles and other disputes.

Top value: Premium air travel

In general, you get the highest value from your AmEx points when you convert them to airline miles and use those miles for premium-class frequent flyer tickets or upgrades. You can convert your AmEx points to Delta miles, one to one, so let’s take Delta as an example. Delta’s asking price for a round-trip business class ticket from Atlanta to London is a tad under $8,000. Since you can get a Sky Choice unrestricted business class frequent flyer round-trip on Delta for 180,000 miles, the value works out to about four cents per mile. You arrive at similar values for trips to other areas.

But is that value realistic? Only if you’re really prepared to pay $8,000 for a business class round-trip, absent the frequent flyer points. For most of us, that’s the case only if we’re on somebody else’s expense account. On our own, we’d probably wind up buying an economy ticket.

Some writers have calculated a value of almost nine cents per mile by comparing the price of a business class ticket with the Sky Saver award requirement of 90,000 miles. But “free” business class seats are so scarce that a Sky Saver award isn’t really worth anything close to the dollar price of an unrestricted seat.

On the whole, I’d guess that for most of us a transatlantic business class Sky Saver frequent flyer award is worth somewhere between $1,500 and $2,000, while a Sky Choice award might be worth double those figures. Either way, those frequent flyer miles (and AmEx points) are worth somewhere in the neighborhood of two cents each.

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Popular value: Coach air travel

Despite all the promotions about exotic destinations, most Americans use their frequent flyer miles for domestic coach trips. A Sky Choice domestic coach round-trip award requires 50,000 miles. The dollar value of a domestic long-haul coach round-trip ticket is probably somewhere around $400 or $500, so I peg the value of each mile at around one cent or a bit more.

As with premium travel, you can get a limited-seat domestic round-trip award for 25,000 miles—half of what you need for a Sky Choice ticket. And it’s also probably worth about half of the value of a no-limits award, resulting in the same point value.

Questionable value: Merchandise

AmEx is pushing conversion of points to a broad range of merchandise. Unfortunately, those merchandise promotions lend themselves to “voodoo” pricing schemes. All too often, you’ll see promotions offering “discounts” from list price in exchange for points on items that are widely discounted or featuring “value” figures that are higher than actual going prices.

Take, for example, a current promotion with Dell that provides a $100 discount on computers for 10,000 points. While that looks like one cent per point, reality is more complicated. If you could go to the Dell website, work out your best deal, then use 10,000 points to knock $100 off the price, the value really would be one cent per point. But you can’t. Instead, you have to deal with Dell by phone on a limited list of options at prices that are likely to be higher than Dell’s best deals. Since Dell’s website regularly knocks $50 to $300 off the list prices of its computers, you might not enjoy any price reduction at all applying the AmEx points to a nondiscounted list price.

Here’s another example: A recent AmEx promotion offered an Optio S5i digital camera for 45,000 points. That might look like a good deal, compared with the camera’s list price of around $425, but hardly anybody pays list price these days. According to Shopzilla, you can buy the Optio S5i starting at $235, with lots of offers at around $275. The latter figure works out to a value of 0.6 cents per point.

Bottom-line value: What you make of it

Premium air travel is the only use for AmEx points I can find with a value as high as two cents per point. Most other uses are around one cent or less, and with some merchandise promotions, the value is essentially zero. So unless you’re into premium flying, you might think seriously about forgetting the airline programs and instead looking around for a credit card that gives cash back awards worth one cent or more per dollar spent.