When comparing rewards cards, it’s vital to determine which gets you the best value. Unfortunately, comparing rewards currencies is rarely like comparing apples to apples.
Our guide will give you the tools you need to make sense of your rewards.
Step 1: Which types of reward currency do you have?
Depending on which card you have, you might earn cash back, points, miles or “miles” (that actually function more like cash back). Here’s a rundown:
- Miles (in the traditional sense): These are what you earn from an airline frequent flier program (or a credit card affiliated with one). Once you have enough, you’ll redeem them for a free flight.
- “Miles” (in the non-traditional sense): These are what you earn from a general-purpose travel rewards card (like the Barclaycard Arrival, for example, or the Capital One Venture). You generally redeem them for a statement credit against already-purchased travel.
- Points: A broad term that can be used to refer to either of the above (depending on the program), as well as hotel points (which are redeemed for a free stay). The term may also be used to describe what you earn in flexible rewards programs, such as the Membership Rewards program from American Express (a CreditCardForum advertising partner). In such a program, your points can be redeemed for cash, merchandise, gift cards, traditional frequent flier miles and lots of other options.
- Cash back: The simplest type of reward. You accumulate real money. Once you’ve reached the minimum redemption amount, you can redeem for a statement credit, bank account deposit or (sometimes) a check.
Step 2: Compute value per point
In general, you’ll use this equation to determine how much each of your points or miles is worth:
On most credit card sites and blogs, value is expressed in cents per point. If you’re plugging a dollar amount into the equation, you’ll need to use this version, to convert dollars to cents:
So how do you determine the cash value of the reward? Look it up. If you’re redeeming miles for a plane ticket, find the cost of that flight on the airline’s website. If you’re redeeming for merchandise, find how much the item would cost in cash. If you have non-traditional miles, log in to your card’s reward site to see how many miles you need for a statement credit of a certain amount.
Let’s look at an example:
Say you want to redeem for a Garmin. In the Barclaycard Arrival’s program, that requires 33,700 miles:
To get the most current cash price, check a site like Amazon:
Now do the math:
Step 3: Calculate return on spending
Point value is only part of the picture. Even if each of your points is very valuable, you wouldn’t want a card that makes you work hard to earn them.
That’s why computing return on spending (rewards as a percentage of money spent) is important.
To do that, you’ll need:
- The value of each point in cents (which we computed above)
- How many points/miles you earn per dollar spent
Here’s the formula:
Using the Garmin example from above, if you were using a card that earns you 2 points per dollar on your spending, you’d plug in the numbers like so:
Step 4: Factor in other variables
A few things can muddy the waters. Many cards have bonus categories (groceries or restaurants, for example) that give you a different number of rewards points per dollar spent.
Other cards refund a certain percentage of your points when you redeem, which kicks up your return on spending somewhat. The Citi AAdvantage Platinum Select, for example, gives you 10 percent of your redeemed miles back. Similarly, the BankAmericard Cash Rewards card gives you a 10 percent bonus if you redeem into a Bank of America checking or savings account.
So this time let’s walk through a more complex example. Let’s say you have a card that earns 2 points per dollar on travel and gives you a $100 statement credit for every 10,000 points redeemed. Let’s also assume that it gives you a 10 percent refund when you redeem.
You want to calculate point value and return on spending for travel.
First, we calculate how much each point is worth.
A $100 statement credit requires 10,000 points, so:
But, wait you get 10 percent of your points back each time you redeem.
So, in reality, you’re redeeming just 9,000 points to get a $100 statement credit:
Now, we calculate return on spending on travel. You earn 2 points per dollar, and each point is worth 1.1 cents, so:
What’s considered a good value?
The rewards community generally agrees you shouldn’t settle for a point value of less than 1 cent each or less than a 1 percent return on your spending.
Yet it’s important to remember that point worth and return on spending aren’t fixed numbers. They’ll often vary within each card, due to spending bonus categories and more-generous redemption options. In general, merchandise redemptions tend to give you a less-optimal point value, while miles redeemed for first-class international tickets tend to give you the best. Statement credits against travel and cash back generally fall somewhere in the middle.
Because of this variation, it’s important to run the numbers and make sure you’re picking the best redemption option for your card –- and picking a card with redemption options you’ll actually use.
Below is one card that has a variety of redemption options –- followed by one with a straight-forward cash-back redemption system if you don’t want to crunch any numbers at all:
Last updated Nov. 14, 2014