When Should I Pay Cash Rather Than Redeem Points?

Update: Some offers mentioned below are no longer available – Citi Hilton Honors Reserve Card

TPG reader Irka emailed me to ask about striking a balance between earning and redeeming points:

"I stay with Hilton when I travel for work, so I tend to stick with Hilton properties when I travel for pleasure. Is there a simple formula for deciding when to pay cash for my room and when to redeem points? How do I account for points earned?"

One way to maximize your points and miles is by knowing when not to use them. To help readers decide between booking an award and paying cash, I publish a monthly list of valuations for rewards from major airline, hotel and credit card loyalty programs. Those valuations can give you a sense of whether a given award redemption is a good deal, but as Irka points out, there are other factors to consider.

First, you should account for the value of points earned during a paid stay. I value Hilton HHonors points at 0.5 cents apiece, so a room going for $100 or 20,000 points per night might initially seem like a toss-up. However, you'll earn 15 points per dollar spent (assuming your earning style is set to points), plus bonuses for HHonors elite status and any ongoing promotions. You can also boost your return by paying with a credit card that maximizes spending on hotel stays, including any of the co-branded Hilton HHonors cards.

For example, a Diamond elite member who enrolls in the current double points promotion and pays with the Citi Hilton HHonors Reserve Card would earn 40 points per dollar spent, or 4,000 points on a $100 stay. That's $20 worth of points, lowering your effective cost to $80 per night and essentially lowering the redemption value to 0.4 cents per point if you choose to book an award instead.

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You should also account for any costs that are avoided by redeeming points, or other benefits that are awarded by paying cash. Taxes can add significantly to your bill, so make sure you're comparing the award price to the total cash price and not just the nightly rate. Also, many hotels waive resort fees for award bookings, which further boosts the value of your points. On the other hand, paid stays may come with extras like free breakfast, dining credits and more, so an award that doesn't come with those perks is less valuable in comparison.

The same general ideas apply to airfare. Some award tickets incur hefty fuel surcharges or other fees that reduce the value of your miles, while paid flights can help you earn elite status. That's more relevant for airlines than for hotels because most chains give you elite credits even on award stays.

Once you've tallied the costs and rewards, you can decide whether you're getting better value by redeeming points or paying cash. That said, I don't think there's a strict line separating a "good" redemption from a "bad" redemption — it's more of a spectrum. If you're on a tight budget and have points to spare, you might prefer to book an award even though you're getting a below-average return. Alternately, it might make sense to pay cash and accumulate points toward a highly valuable redemption in the future even if you'd be getting a decent return by redeeming now.

Ultimately, you get to decide what your points and miles are worth based on how you use them. Taking all the variables into account gives you a more sophisticated look at the value of an award and will help you make an informed decision about how to pay.

If you have any other questions, please tweet me @thepointsguy, message me on Facebook or send me an email at info@thepointsguy.com.
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