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The Honolulu Advertiser
Posted on: Sunday, September 30, 2007

Frequent-flier miles vs. cash rebate

By Tim Winship

The great credit card debate: Frequent-flier miles or cash rebate?

For many consumers, choosing a credit card comes down to choosing a future stream of awards. And two of the most popular credit awards are frequent flier miles and cash back.

Although miles and cash may seem like apples and oranges, there's fundamental similarity.

A cash refund is a rebate by definition. And one traditional view of frequent-flier miles is that they also constitute a rebate: buy a ticket, receive miles which can be combined with other miles for another ticket.

While it's always financially prudent for mile collectors to ask whether there are more lucrative rebates to be had outside the realm of travel rewards, it's even more important now, in light of the significant decline in the value of frequent-flier miles in recent years. The question: Might it be a better deal to trade in your airline card for one of the available credit cards which reward users with a straightforward cash rebate?

RANGE OF REBATE CARDS

Among the many credit cards that use cash rebates as their central selling point are the following three:

First, the Cashback Bonus card from Discover is a descendent of one of the original rebate cards. It takes a tiered approach to awards, rebating .25 percent on the first $1,500 in yearly charges, .50 percent on the second $1,500, and a full 1 percent on charges exceeding $3,000. Cardholders also can earn a 5 percent rebate on purchases of merchandise in selected categories, which change quarterly.

For consumers who reach that $3,000 threshold early in the year, or whose purchases happen to fall within the merchandise categories generating the 5 percent rebate, the card offers solid value. Otherwise it's an iffy proposition.

The Discover card has no annual fee.

The CashReturns MasterCard from Citibank takes a more straightforward approach, offering 5 percent cash back on all purchases for the first three months and a 1 percent rebate thereafter.

As with the Discover card, there's no annual fee for the Citibank product.

Another variation on the cash rebate theme is the Fidelity Investment Rewards Visa Signature card from FIA Card Services (formerly MBNA).

The featured benefit of the card is a 1.5 percent rebate, which is deposited into a customer-designated Fidelity Investments account. For every dollar charged to the card, consumers earn one point. Points in turn can be redeemed in 5,000-point increments, with every 5,000 points generating a $75 deposit into a Fidelity individual, joint, trust, corporate, traditional IRA, Roth IRA, or rollover IRA account.

The process is manual rather than automatic, so cardholders must monitor their earnings and go online to convert them into dollar deposits when they reach set thresholds. But the payout is generous and there's no annual fee to hold the card.

MILEAGE CALCULATION

The value of frequent-flier miles has always been a moving target. Ticket prices rise and fall. Sometimes award seats are readily available; other times, they're nowhere to be found. And airlines differ in their overall award allocation policies, ranging from moderately generous to tight-fisted.

But to generalize — taking into account the price of paid tickets, the limited availability of award seats, and so on — my current assessment is that the average value of a frequent-flier mile is around 1.2 cents.

That puts the rebate value of a frequent-flier mile squarely between the payout of the Citibank and the Fidelity cards. And they all fall within a fairly narrow range between 1 cent and 1.5 cents.

But bear in mind that the valuation of miles does not factor in the value of one's time — an abundance of which can be spent, sometimes futilely, searching for available award seats. When the hassle factor is included in the calculation, even the less generous rebate cards offer roughly the same value as a mileage card.

WHAT'S IN MY WALLET?

I maintain two credit card accounts, one for travel rewards, the other for cash.

The first is a MasterCard linked to my primary airline program. The second, more recently acquired, is the above-mentioned Fidelity Visa card. When I have a trip on my wish list and need miles for a free ticket or an upgrade, I use the airline card to add to my frequent-flier account. Otherwise, the Fidelity card is my card of choice. As much as I covet airline miles in the short run, a solid 1.5 percent rebate invested toward future purchases, or toward retirement, increasingly seems more rational.

If significant numbers of consumers begin scaling back their use of mileage cards in favor of cash rebate cards, as I have done, it could pressure the airlines to adjust the value proposition of their programs. In particular, the airlines would be forced to increase the supply of award seats, to regain some of the value shed by mileage programs. And that would be yet another benefit of charging my next purchase to a rebate card.

Tim Winship is founder of www.frequentflier.com.

Reach Tim Winship at questions@frequentflier.com.