This morning when watching TV with my nine year-old son an American Express commercial came on. This prompted him to ask me about the reward points they were promoting.
His question was, “How much is a point worth?” Good question, and one I’m not sure most credit card users ask themselves.
On face value the question is a simple mathematical equation:
Points Required to Redeem Reward/Retail Price of the Reward = Point Currency
Let’s look at the cost of a FREE airline ticket purchased with reward points. The average domestic airfare in the first quarter of 2010 is $328.00. Let’s say that you can get an airline ticket for 25,000 points – this assumes that you didn’t need to use a “rule buster” that costs 50,000 miles.
Based upon our equation, 25000 points/$328 = 76.22 points per dollar.
Since points are earned for each dollar charged on a rewards credit card this means that you must charge $76.22 for each dollar that you can use towards the “free ticket”.
Because we know the typical consumer spends between 12% and 30% more when they pay by credit card we can calculate the real cost of this $328 ticket.
If you were spending 20% more and you charged $25,000 over a year – so you can get the “free ticket” – the true cost of they ticket is $25,000 x .2 = $5,000.
Want to buy a $328 ticket for $5,000? I didn’t think so – after all you’re smarter than a 4th grader…right?