The OC Rule – Forbes Advisor

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The first class seat to parts unknown. The five star luxury hotel. The amazing experiences you’ve had with your own family that would have not been remotely possible without miles or points. Ah, what a wonderful world we live in to be able to “hack” the system and travel for free…according to the clickbait headline.

Not So Fast.

Whenever I see a report about traveling for free with miles and points, I cringe because not only is telling consumers that miles and points are free misleading, it can be downright dangerous. Selling credit cards while also selling “travel with credit card rewards is free” is leaving out vital context.

The view of some miles and points experts is that customers are savvy enough not to get themselves into too much trouble by signing up for a few credit cards. And that can be true if the fees don’t swallow the rewards and if you pay off the balance every month.

But there are many times in life even the most sophisticated consumer should hold off filling their wallets with a pile of new plastic. For instance: if you want to buy a new house, you’re making the mortgage application process more complicated because of all those credit applications.

It’s tremendously easy for an overzealous points collector to get themselves into debt trying to hit a spending threshold to earn that welcome bonus. Cards generally give welcome rewards in return for spending anywhere from $3,000 to $20,000 in a few months. It’s easy to see how someone could justify an unnecessary large purchase (and get stuck carrying a balance) just to get over the line to get a welcome bonus. Without the incentive of “free” points, that purchase might have been postponed for a time when it wouldn’t have over-extended their budget.

The OC Rule

Whenever you are tempted to pursue that shiny new credit card bonus, I want you to invoke the OC rule. Let me explain. When I first started earning miles and points I fell into the “points are free” trap until I had a friend ask me point blank what I could have gotten had I used a cash back card instead. I realized she had a point.

Every decision, particularly every financial decision, has an opportunity cost, or OC. The OC with travel rewards is the money you gave up in order to get the miles and points you earned for that dream trip. Even a trip financed 100% with credit card points isn’t “free” because you could have taken that same spending activity and targeted it towards a cash back card.

From that day to today I value my miles and points (with exceptions such as IHG or Hilton) at 2 cents each, the value I could reasonably get with a cash back card, or at the actual cost of production. 30,000 Ultimate Rewards? Worth $600 OC. Put on a cash back card, I could have used those points to pay the mortgage or water bill. That “free night” with a hotel card renewal? The cost of the card renewal fee.

If Points Aren’t Free, What Are They?

Points are a tool, and like any other tool are neither good nor evil. Consider dynamite. Used responsibly to tunnel through a mountain, it can help you get where you want to go. But what if you give that same dynamite to Wile E Coyote? You just stand by and wait for the inevitable boom.

Let’s give an example. A couple of years ago I got four tickets for my family from Santiago, Chile to Iguazu Falls, Argentina. I paid 12.5K Skymiles and $30 each, but if I had paid cash the price for the same flights was $533.

Travel is FREE math: “My $533 tickets were only $30 or 94% off!”

OC Rule math: “My $533 tickets were only $280 (12.5K SkyMiles X 2 cents per mile + $30) or 47% off.

OC math is a lot less sexy, but a lot more real. And you won’t blow yourself up doing it.

Champagne Wishes, Beer Budget

Another version of the “points are free” fallacy lies in how some sales outlets value premium award flights and hotel stays. I like a lie-flat seat as much as the next girl, but I’m not paying retail for it in any circumstance. You may not either (or even if you would, the concept applies).

I used OC Rule math to help me determine if I got a good deal for an upcoming trip to Greece. I bought business class flights to Crete, stopping over in Athens, for 88,000 Membership Rewards points (transferred to ANA) plus $176 round-trip. The flight has a $4,450 retail price but I wouldn’t say I got a $4,450 flight for $176.



A fairer way to value the points is to consider the coach price of the same trip since that’s what I would have bought:



To review: I’m spending 88,000 points + $176, so the math looks like this:

Travel is FREE math: “My $4,450 tickets were only $176 or 96% off!”

OC Rule math: “My $2,220 tickets were only $1,936 (88K X 2 Cents + $176) or 13% off AND I get to fly in business class instead of economy.”

I’m happy to get 13% off of my flights by using my miles and a value of 2.3 cents per Membership Rewards point (2,220-176/88,000). The big seat is just a bonus.

Bottom Line

Instead of touting travel with miles and points as free, I wish a more balanced picture were presented. How about something like “by strategic planning, careful budgeting and leveraging promotions you can travel for less than what it would normally cost and maybe give you access to experiences you otherwise wouldn’t be able to afford”?

Nah…who wants to read about that?

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