Opportunity cost: The hidden cost of points

Something that isn’t always discussed when talking about redeeming points is opportunity cost. It seems seductive to use points to get a FREE flight and sometimes we get excited without actually counting the cost. What does a point really mean? Let’s take a deeper look.

The many different loyalty programs

There are many different kinds of credit cards out there. It’s no surprise that travel cards are popular with people because of the allure of FREE. Even though we KNOW that it’s not really FREE, we still gravitate towards programs that allow you to use points to get a flight. You can break travel cards into a few categories:

  1. Cash back for travel.
  2. Loyalty Points for use in travel portals.
  3. Brand Loyalty Points

Easy way: Cash for travel

Most cash back travel cards are simple to understand. They’re either in actual currency like WestJet dollars, where $1 WJD = $1 CAD or they are points with a fixed value, like 100 pts = $1 of travel. They all work slightly differently but for the most part they’re easy to understand, easy to redeem, and easy to use:

  1. Buy some eligible travel related item
  2. Log in to account
  3. Use points for a bill credit

In many cases points tend to be fixed to 1¢ / point… so 100 points will get you $1. Many credit cards with these point systems will also earn points at 100 points / $1. You don’t have to be good at math to know how much these points are worth. For every dollar that you spend, you basically get %1 back in travel.

Easy to understand, easy to use. Not extremely rewarding, not that exciting, but really important as a baseline. Considering many of these cards will have NO annual fee and that they often give MORE than 1% back, this is your ABSOLUTE MINIMUM THRESHOLD. If you have to spend money on something aim to get at LEAST 1¢ from every dollar you spend.

Harder Way: Loyalty Points Portals

On the other hand, many programs use portals that you have to use in order to book travel. These are points programs like TD Points, BMO Rewards, and other programs. In these programs prices might still be fixed, or they may have tiers. In many cases these programs offer better value than cash back, but you’re more restricted in how you can use them. They’re still pretty open as these portals usually allow a variety of hotels, airlines, and car rentals… but still more restrictive than buying whatever travel you want and getting money back.

These points are usually still fairly flexible and oftentimes they’ll give you slightly better value as you’ll get more points for your spend. At a minimum, given the spend multipliers, I’d value these at 1.25–1.5% cashback on average.

Hardest Way: Brand Loyalty Points

Brand loyalty points are strongly tied to a brand instead of a credit card or financial institute. They directly reward you for using that specific brand. They’re often the most rewarding points systems, but also usually the most restrictive. Airlines and hotel chains, restaurants, and even grocery stores have brand loyalty points.

Brand loyalty points are fully controlled by the brand owner. They are often lucrative, complicated, full of loopholes, and have the widest variety of valuations. Values for airlines can be as low as 0.5¢ / points or as high as 15¢ / point. If you spend $1000 and got 1000 airline points and each point was worth 15¢ that’s 15% back on every dollar you spent!!!

Please note that it’s VERY uncommon for airline points to be actually worth 15¢ to you unless you’re the type of person that has no problem dropping $15,000 on a first class ticket somewhere. You have to make your own personal valuations of what this ticket is worth to YOU personally. If you’d have paid $2000 out of pocket for that ticket… and you used 100,000 points… then in REALITY those points are worth 2¢ each. And this isn’t including taxes you need to pay.

The point is that point systems vary and the more work and effort you put INTO them the more value you can derive out of them, with the by product of giving up flexibility. YOU have to be more flexible.

What about opportunity cost?

The Oxford dictionary defines opportunity cost as the loss of potential gain from other alternatives when one alternative is chosen. With points this means that if you could use points in more than 1 possible way you have to evaluate whether another easier route would have been better.

This is best explained with an example. Let’s take the example above of three points systems. Let’s say we spend $25,000 on a credit card. To keep it simple we’ll say that this would give us 25,000 points. Of course in reality, sometimes you get a points multiplier, but we’re keeping it simple.

Cash back scenario

This one’s simple. 25,000 points is worth $250. We buy a $400 flight, redeem our points and get $250 off. We just got our flight for 62.5% of retail. We can buy ANY airline we want, from LCC to full-service carriers. As long as the credit card considers it travel, we’re golden.

Points Portals

This one is similar, but we have to determine if things like taxes are included or passed on. We book that $400 flight, but are there booking fees? Taxes? We may have to pay $120 in taxes and fees for that flight. So we got $280 of value instead of $250, but there were more restrictions.

Brand points

Now let’s apply this to a brand program like Aeroplan. Aeroplan allows you to fly anywhere in USA (lower 48) or Canada for 25,000 points. Whether this is worth it will depend on where you’re going. A $400 flight might be about what you’d pay to fly to many places, but in some cases, you’ll pay more, sometimes less.

YVR-LAX tickets is a really common route. 25,000 points… but the flights can usually be found under $300. On the other hand, YVR to Eastern Canada or to some small airport in the US during the summer high season may be as high as $800 or more.

You can probably easily derive $250 of value out of 25,000 points on most routes, even after taxes, but remember… you’re giving up flexibility. You HAVE to fly based on seat availability and have to fit YOUR schedule to the airline… flying when THEY have emptier planes or planning FAR in advance. Those are real costs. Do you REALLY need to fly on Air Canada to Las Vegas for a weekend when you could find a LCC like Swoop for much cheaper?

Flexibility has a real cost and it’s important to consider the opportunity cost when deciding whether to use your point or just pay for a flight with cash.

This is one good reason that it’s good to be in several points programs if you can, as they all have their strengths and weaknesses.

Happy Point Spending!