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Opportunity cost: The cost to earn miles and points

When you sign up for a new credit card and get a generous welcome bonus or pull out your airline credit card for spending, you may feel like you’re getting something for free. Whether you’re earning Ultimate Rewards, ThankYou Points, Membership Rewards, or Delta SkyMiles, you have the ability to use your miles for travel

But using your card to earn miles or points is not free. Understanding the opportunity cost of earning miles and points can help you make better decisions to maximize your spending and optimize your wallet.

Let’s dig into this.

What is opportunity cost?

In economics, an opportunity cost is the loss of potential gain from other alternatives when one alternative is chosen.

As an example, let’s say that I spend an hour writing an article for my website. I could otherwise be doing other things with my time. Sleeping. Working out. Playing Diablo 4. (Yes, I’m a nerd.) In every case, the things that I’m giving up in order to write this article are my opportunity cost.

But opportunity cost isn’t just an abstract concept only applicable to academics at universities. Everything that you do has an opportunity cost. And thinking about opportunity cost to earn miles and points can help you make better decisions about how you earn credit card rewards.

Your opportunity cost is probably at least 2% cash back

So how does opportunity cost apply to earning miles, points, and travel rewards? When you put spending on a credit card in order to earn a specific reward, you are giving up the opportunity to earn rewards on that spending elsewhere.

Everyone should have a credit card that earns 2% cash back. Many banks offers 2% cash back cards with no annual fee. And if you have one of these cards in your wallet, your opportunity cost is the $20 that you earn for every $1,000 of spending on that 2% cash back card.

So, what does this look like in practice?

A practical example with Delta SkyMiles

Let’s say that I have both a 2% cash back credit card and a card that earns 1 Delta SkyMile per dollar. Delta SkyMiles can be redeemed for award flights on Delta and its partners. And the Delta SkyMiles credit cards with annual fees give me a 15% discount on award tickets through the TakeOff 15 benefit.

That means that if I spend $24,600 on the card, I can earn enough miles to take this flight to Seattle.

Delta SkyMiles award search result showing a direct flight at 11:05am to Seattle. The flight is priced at 24,600 SkyMiles in Main Cabin, after a 15% cardmember discount.

But if my alternative is earning cash back, I could earn $492 of cash ($24,600 * 2%) with that same amount of spending. I could then buy the same flight for cash, at a cost of $319, and have $173 left over.

Delta SkyMiles award search result showing a direct flight at 11:05am to Seattle. The flight is priced at $319 in Main Cabin.

In the above example, clearly earning cash back rewards and paying for the flight with cash is the better deal. You get the same flight, but if you choose to earn cash, at the end of the day, you have $173 of cash left in your pocket.

In some cases, your opportunity cost is higher

It’s pretty easy to think of your opportunity cost of spending as 2%. But depending on which credit cards you hold, where you are spending money, or how aggressively you go after credit card welcome bonuses, your opportunity cost could be much, much higher.

In some cases, you can get a credit card that earns more than 2% back on all of your purchases. The Bank of America Unlimited Cash Rewards credit card earns 2.62% cash back on every purchase if you have a banking relationship big enough to qualify for Preferred Rewards with Platinum Honors. If you hold this card and have Platinum Honors, your opportunity cost for credit card spending is at least 2.62%.

Some cards offer higher cash back rates for purchases in select categories like groceries, gas, or travel. The Blue Cash Preferred card from American Express offers up to 6% on grocery store spending. If you’re not maximizing the grocery store spending on this card, the opportunity cost of charging this spending to another card is 6%.

If you frequently sign up for new credit cards to go after welcome bonuses, your effective opportunity cost of spending might be much, much higher. Some of the best welcome bonuses earn an effective 20-40% cash back. (Consider that you might be earning a $200 welcome bonus for $500-$1000 of spending.)

Your alternative might be a cash discount

In some cases, you might have an opportunity cost that isn’t related to the credit card rewards you earn. Some merchants, especially smaller stores, encourage customers to pay in cash by giving a cash discount or charging a surcharge for credit card purchases.

If it’s 10% cheaper to pay cash for your $20 purchase, you can choose between earning 2% in credit card rewards ($0.40) or pocketing $2.00. Personally, I’d choose to have an extra $2.00 in my pocket.

Bottom line

Understanding and considering the opportunity cost of putting spending on a credit card will help you make better decisions about which cards to use. At the end of the day, if you think about opportunity cost, you’ll end up getting more value out of your credit card rewards and benefits.

Whether you’re going after a welcome bonus, putting spending on a card to earn points in a specific loyalty program, or putting a specific purchase on a card to get an insurance benefit, know that you’re always giving up something. You’re giving up the rewards you could earn on your next-best card.

About the author

  • Aaron Hurd

    Aaron Hurd is a credit card, travel rewards, and loyalty program expert. Over the past 15 years, he has authored over a thousand expert contributions published by leading outlets including WSJ, TIME, Newsweek, Forbes, NerdWallet, The Points Guy, Bankrate, CNET, and many others. He has also served in consulting roles for many of these same outlets, designing content strategy, hiring teams of teams of editors and contributors, developing thought-leadership pieces, and ghost-editing for senior editors. Aaron is well-known in the miles and points community and regularly presents about travel rewards at conferences like the Chicago Seminars and Minnebar. Aaron has enjoyed the game of optimizing credit card rewards since getting his first credit card shortly after he turned 18. He started learning about credit cards and travel rewards from the (now defunct) FatWallet Finance forums and FlyerTalk. He holds more than 40 open credit cards and has first-hand experience with almost every major credit card product.

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