Heavily promoted and marketed, but little understood, credit card mileage and points schemes offer an exciting way for savvy consumers to improve their lives at the margin.  While they cannot create happiness (only a warm gun can), when used properly, particularly with large sign-up bonuses often on offer by banks and credit card companies, it can allow you to afford that trip you’ve dreamed of, that new gadget you’ve had your eye on, or simply get a good chunk of cash back.

Since credit cards, their swipe fees, and their high interest rates are so profitable to banks and credit card companies, they can afford to essentially “kick-back” some of those profits to their customers in the hope of luring in still more customers in a virtuous feedback loop.  When you earn miles and points, you are essentially dipping your cup in the money stream and taking a little piece of the action back for yourself.  It can take as few as 25,000 miles for a domestic round trip airline ticket, which can easily have a retail value of $500-$800 meaning you are getting more than a 1% rebate on all of your spending.  Many who are “professional” miles and points afficionados can do even better if they save up their miles for international first class and business class flights which can easily cost several thousand or even tens of thousands of dollars.  Many times these tickets can be procured with somewhere around 100,000 points, not so hard if you get a few big sign up bonuses and put your spending in the right bonusable categories (for example Chase on their INK cards gives 5 points per dollar spent at office supply stores).

Banks and credit card companies have a variety of ways of making this work for them.  First, they know that by bringing in more customers they only need a few to run up fees and interest payments to balance out all the other folks who play the game well and earn points.  Also of course, the more you use your cards for the points, the more swipe fees they get and the greater potential for fees and interest payments to eventually arise.  If you return points for items on their various malls (Chase and American Express both have points malls to buy items with points), those items are usually being sold at 1 cent a point or less(meaning a $1000 laptop would cost 100,000 points).  This is a fine deal for them as likely these companies are buying the items at wholesale prices to boot. So in the end, for every cent they give you, they are probably making at least three by enticing you to charge more.

Transfering points to airline miles can be among the best deals for customers, but even here banks come out fine.  They usually have some kind of partnership arrangement with various airlines and therefore use it as a way to bring in more business.  For example, you might not be carrying a Chase card at all if you are a United Airlines flyer and United was not a partner with Chase.  Few airlines have relationships with more than one of the major banks so this is a way to create customer loyalty and bring in new business.

The airlines, of course, are also quite happy with this arrangement as they sell vast quantities of their miles/points to credit card companies and banks. Many mileage programs are far more profitable than the airlines themselves.  Some, like aeroplan, have even come out as independent businesses.

All this explanation is really just my way of proving to you that everyone is making money in this game, and if you do not understand or don’t play it well you are leaving thousands of dollars a year in “income” on the table.  Whether it is simple cash back, points for merchandise, or the potentially most lucrative of all in absolute terms – premium cabin air travel – you have a lot to gain by playing the game properly.  While this can become a bit obsessive and even judgmental, true points/miles gamers look down upon those who merely take cash back or buy a toaster, it is a powerful way to make a little money every time you spend any amount of money.

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Related Resources:

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