When we started into the points and miles hobby, I didn’t think about whether I was scamming the credit card companies that much, but each time we opened an additional credit card account it bothered me more and more. What if they figure out what we’re doing? Will we be caught and put into some sort of credit jail and never be able to borrow anything ever again? Ok, that’s overly dramatic but I was worried that we’d get cut off, and we wouldn’t be able to do this anymore.
After spending way too much of the last year thinking about how and why the points and miles game works, I believe I have a theory, of sorts. It’s basically this – You’re not screwing the credit card companies over, they’re more than happy to do this, it’s a symbiotic relationship.
Relax, you’re not in control.
What? But I can only relax when I’m firmly in control!
Look, the credit card companies are in 100% total control of the points and miles world and you have zero control, but it’s fine. That’s why I’m convinced that I’m not scamming anyone. Every time I apply for a credit card, they pull my credit history, it’s literally right in front of them, if they wanted to stop me from doing this, they would, but they don’t. I’m not hiding anything, hell there are a ton of blogs and podcasts where they flat-out discuss all the ways they maximize the points and miles game and those people haven’t had their accounts shut down (ok, there have been a couple, but only when they’ve violated terms and conditions).
There is a huge difference between the value of points and the cost of points
Hands down, the greatest value that someone earning credit card rewards will get is in travel rewards. It’s way more valuable than cash back. But, I’d bet it’s also less expensive to give out. Look at the massive rewards companies are willing to give out for airline or hotel rewards. A quick glance at Chase’s website shows bonuses for co-branded hotel and airline cards easily worth between $600 and $1500. Cash back cards on the same site, however, are usually $200. That seems like an odd disconnect, unless you figure out that they want you to use it for travel and why they want you to use it for travel.
Law of Supply and Demand
The supply of hotel rooms and flights are completely inelastic. Flights have the same number of seats on Tuesday as they do on Saturday. It is the same with hotel rooms. There are days which are extremely popular and others that are not. For example, if you own a hotel by the beach, there is a good chance that you are going to be fully booked on a weekend in the summer. On the other hand, you might be completely empty on a Wednesday in the winter. On the flipside, if you have a hotel near a convention center, a weekday in April might be fully booked where a weekend might be mostly empty. Getting people in those empty rooms can make a huge difference in your profitability. The problem is that cutting your prices to fill rooms could be counter productive. Lets say you own a hotel that has 100 rooms. The typical going rate when you are busy is around $200 and you have no problem filling up at those prices. However, on an off-day, a $200 room charge only gets you 30% full. The typical thought would be that you need to cut your prices. The problem with that is that you might have to cut the price of the room to $100 just to get 50% full. Your revenue actually drops doing that.
What you need is a way to offload extra inventory without cutting the price for the people who are still willing to pay you $200. I’m sure there are a variety of ways that hotels do that, but setting up an alternative currency that isn’t really going to compete with cash is a really good idea. First of all, the hotel chain can urge loyalty by getting you into their points program. Maybe you go out of your way to stay with a certain hotel chain, because you like their points program. That’s good for them. Secondly, when someone does book a hotel on points the hotel does receive compensation for the room, although I assume it is at a much lower rate. But since so much of hotel costs are fixed, the additional room can still be profitable at that lower compensation.
Airlines are similar to hotels, the costs to operate the flight are going to be very similar whether or not all the seats are full. Yes, technically if there is more weight on the plane and if the person in that seat is getting snacks and drinks, it will cost more to operate the flight, but not a lot more. So getting some sort of marginal compensation from those points does make the flight more profitable.
Because of this, airlines and hotels work with credit card companies to develop these alternate currencies that can help fill seats or rooms on days when they wouldn’t ordinarily be full. The credit card companies make money on interest and credit card processing fees and they use the lure of signup bonuses to acquire new customers. They are literally begging you to take the points, and that’s fine, it’s good for you too. That is, as long as you follow the first commandment of points and miles.
Thou shalt not pay interest, ever.
Points and miles can be very lucrative for consumers, but the interest on rewards cards, especially, are ridiculous. Here’s the thing, I don’t know what the interest is on any of my cards, because I never pay interest. Every month I autopay the full statement balance. Set it and forget it. If you are paying interest on those cards, all of the benefits you are getting from those cards disappear very quickly.
You’re not really getting the deal you think you’re getting
Hotel and Airline programs are not going to give you awesome points and miles deals on flights and rooms that they expect to sell out. If you think you’re going to use your airline miles to get Saver rates on a flight to Cancun on a Saturday during spring break, I got bad news for you. You’ll probably be able to book with points, but those rates are probably 3x off-peak rates or higher. I looked at how much United would charge for a Saturday to Saturday roundtrip to Cancun during spring break and it was 110,000 miles, if you shifted it to Tuesday to Tuesday, all of a sudden its 40,000 miles, if you look in October, all of a sudden you can go round trip for around 25,000 miles. If you are going to get maximum value for points and miles, you will need to be flexible about when you book, because that’s what this is about. They are trying to get rid of their excess off-peak inventory of seats and rooms.
That sounds bad, but I kind of like it. We recently stayed at the all-inclusive Hyatt Ziva Los Cabos in San Jose Del Cabo in early January. We were able to book that for 43,000 points for 2 nights for a room that routinely goes for $600 a night. The hotel was about 25% full, and that’s why we got such a good deal. I actually enjoyed it more, because the pool wasn’t full and we got great service everywhere in the hotel. As it gets closer to spring break however, the availability has dropped off and the available rooms have much higher point rates per night.
I don’t think points and miles are going away any time soon
I’m convinced now that this is not going away anytime soon. I’ll be able to earn massive amounts of points and miles and use them for vacations for as long as I want. It’s because hotels and airlines have excess inventory that they want to get rid of and I’m happy to take them up on the offer. The more flexible that we can be, the more ridiculous the deals will be, and as the kids get older, we are able to be more flexible. So again, I’m not scamming the credit card companies, I’m working with them.
Newby to Expert Traveler 