Which Is Better, 2% Cash Back Or Southwest Points?
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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.
Let’s take a look…
How Much Are Southwest Points Worth?
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!
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.
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.
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.
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.
But once he has earned the Southwest Companion Pass he is better off with the 2% cash back cards.
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.
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Either $5 or 5% of the amount of each transfer, whichever is greater.
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