Which Is Better, 2% Cash Back Or Southwest Points?

Which Is Better, 2% Cash Back Or Southwest Points?

Million Mile SecretsWhich Is Better, 2% Cash Back Or Southwest Points?Million Mile Secrets Team

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Million Mile Secrets reader Rick Castorani writes on Twitter:

Are points really better than cash back? I can’t quite figure out which is better, 2% cash back or Southwest points.
Which Is Better 2 Cash Back Or Southwest Points
Which Would You Choose, Cash Back Or Southwest Points?

Let’s take a look…

How Much Are Southwest Points Worth?

Which Is Better 2 Cash Back Or Southwest Points
Southwest Wanna Get Away Award Flights Cost 70 Points per Dollar

Southwest points have an advertised fixed value of 70 points per dollar.  That means 1 Southwest point is worth 1.42 cents ($1 / 70 Southwest points).  But they are often worth more because the points cover the cost of taxes as well!

Which Is Better 2 Cash Back Or Southwest Points
Southwest Points Are Worth At Least 1.42 Cents per Point

How Much Are Cash Back Points Worth?

With a card like the Fidelity AMEX you get 2% cash back on all purchases.  So you get 2 cents for every $1 you spend.

And with the Barclaycard Arrival Plus® World Elite Mastercard® you earn ~2.1% back if you redeem for travel.

2% Cash Back Vs. Southwest Points:  An Example

Let’s say Rick has a $20,000 home improvement project coming up.  Should he put this spending on his Southwest card or his 2% cash back card?

Note that you are almost always better off using your spending towards getting new sign-up bonuses.  But sometimes you will have to make purchases which you can’t use towards a credit card sign-up bonus.

If Rick uses a 2% back card like the Barclaycard Arrival Plus® World Elite Mastercard®, Rick will get 40,000 points ($20,000 in spending X 2 points per $1 spent).  And these Barclaycard miles are worth ~1.05 cents per point if use them towards travel.  That’s because you get 5% miles back when you redeem for travel.

So Rick’s $20,000 in spending will get him $420 (40,000 points X 1.05 cent per point) towards travel.

Or with the Fidelity AMEX, Rick would get $400 deposited into his Fidelity account ($20,000 X 2% cash back).

Note: You can only get cash back deposited into certain Fidelity accounts.

But what if he puts his $20,000 in spending on his Southwest credit card?

Rick will only earn 1 Southwest point per dollar spent on his Southwest card.  So he will earn 20,000 Southwest points ($20,000 home improvement spending x 1 point per dollar).  Southwest points are worth at least 1.42 cents per dollar.  This means Rick’s Southwest points are worth ~$284 (20,000 Southwest points x 1.42 cents per point).

Clearly, $440 in cash back towards travel is worth more than a ~$284 Southwest flight!

Double the Value of Southwest Points With the Companion Pass!

However, if Rick can use the $20,000 spending to earn the Southwest Companion Pass, his Southwest points will be worth much more.

Emily and I love our Southwest Companion Pass because it has given us the ability to visit family and friends around the country for close to free.

Which Is Better 2 Cash Back Or Southwest Points
Emily and I Used Our Companion Pass to Travel to Key West

Rick can go a long way towards earning the Companion Pass by signing-up for 1 personal Southwest credit card and 1 business Southwest card (when the offer is for 50,000 miles after completing the minimum spending).  With the Companion Pass, your companion travels with you for free for up to 2 years anytime you fly Southwest.

This is 1 of the best deals in travel because it doubles the value of your Southwest points!

With the Southwest Companion Pass, Rick’s Southwest points are worth 2.84 cents per point  (1.42 cents per Southwest point x  2 people flying for free).

Rick’s 20,000 Southwest points will now be worth $568 (20,000 points x 2.48 cents per point) towards Southwest flights.

This is worth ~30% more than the $420 he would get back towards travel with the Barclaycard Arrival Plus® World Elite Mastercard®.  And ~40% more than he’d earn in cash back with the Fidelity AMEX!

But once he has earned the Southwest Companion Pass he is better off with the 2% cash back cards.

Bottom Line

Typically, 2% cash back is worth more than Southwest points.

However, with the Southwest Companion Pass you double the value of your Southwest points.  So if you can use your spending to earn the Companion Pass, it will be worth more than 2% cash back.  But once you earn the Companion Pass, you are better off with 2% cash back.

When do you prefer to earn points and when do you prefer cash?

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Another advantage of Southwest points is their flexibility. Southwest award bookings are fully refundable; Southwest "Wanna Get Away" revenue bookings are not (if cancelled they can be reused with no change fee, but with significant restrictions). For me this flexibility makes building up a significant stash of Southwest points in my account worthwhile, even though on paper I could get more by spending on the Barclay Arrival card.

Joetraveler, that is something I hadn't thought of before. I could pay for SW flights with the gift cards, earn 5X, and put my points elsewhere.

Rob P., I think I will transfer to United. United flies in/ out of DEN to places we travel. Are award seats pretty easy to get on United? That might work out.

I just don't want to put miles somewhere and regret the decision.

I will check out Hyatt. I haven't looked at any hotel cards, except the Starwood Amex, and that card I use for Alaska miles.

Thanks for the advice!

Million Mile Secrets

@Juli - You're better off waiting. If you earn the points this year, it will reset to zero points next year.

Juli, the companion pass is earned by accumulating 110K points IN A CALENDAR YEAR, so if you completed the spend now you would have to reach 110K points this year in order to qualify. If you don't make the 110K in a calendar year, you start over from 0 CP qualifying points on Jan. 1. (This doesn't affect your point balance available for purchase of tickets, just the number of points applied toward your CP progress.) You'd definitely be better off waiting to apply.

Also using British Airways points domestically on American Airlines is a great value.

Cindy and Rick - most people find that they get the most value with United Airlines and Hyatt when using UR points. Around 2 cents per point or more.

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