Placing Our Bet: Deciding Between Cash back or Transferable (But Cashable) Points in Today’s Uncertain Environment

Placing Our Bet:  Deciding Between Cash back or Transferable (But Cashable) Points in Today’s Uncertain Environment

In light of current circumstances we’re looking at shifting credit card spending away from cards which earn program-specific points, and aiming them towards either…

  1. Cards which earn cashback
  2. Cards which earn transferable currencies that can be converted to cash.  

The common theme being the ability to go to cash.   

With non-essential travel on hold, cash is an appealing option.  But we also like premium travel, and normally get outsized value with transferable currencies.  So, as someone who prioritizes travel, but wants the fallback option of cash, which of the two above options is the best path forward, transferable but cashable points, or a 2% cash back card?

Our Initial Leaning – Because of our priority on premium travel, a card which earns transferable currency would normally be our first choice. Transferable, cashable, currencies also provide for a cash redemption, but it’s hard to get an uncapped, sustainable 2% with transferable currencies. If it turns out cash is the priority, it seems a 2% cash back card would be the most profitable.

So… as someone wants to have their cake (the points) and eat it too (the cash), which is the best path forward given the uncertianity in the travel landscape?

chips points and miles

Placing Our Bet 

We’re going to take a probability-based approach to answering this question. A method more likely to appear at a poker game, than a flyertalk forum.  And… to make it practical, we’re going to look at specific case-study.

The question we’ll consider is: In light of our preference to travel, but also desire for a safety net of cash back, is it better to use a 2% cash back card, or the Chase Freedom Unlimited card for spending going forward? 

Case Study – Should We Take A Chance with The Chase Freedom Unlimited Card?

The Chase Freedom Unlimited earns an uncapped 1.5% on all purchases.  Moreover, these points can be cashed out for 1 cent apiece.  

When the card is paired with one of Chase’s premium Ultimate Rewards cards, the points can also be transferred to a variety of travel-related transfer partners for premium partners. (If we go this route, we’ll need to add back in a Chase premium card).

The card appears to offer the best of both worlds – Transfer options and cash out options. So how do it stack up?

If points are transferred out, it’s a strong value– We value Ultimate reward points at 2.25 cents apiece when used for premium travel (see the appendix for more the valuation). With this assigned value, the Chase Unlimited card earns 3.375 cents of value per dollar spent (1.5 points per dollar spend x a value of 2.25 cents per point).   

If points are cashed out, it’s second best – If travel continues on hold, and end up going to cash, the Chase Freedom comes up short. As noted above, the Chase Freedom Unlimited earns 1.5 cents of value when redeemed for cash.  A 2% cash back card earns…well… 2%.  2% is more than 1.5%. So, the 2% cashback looks like a winner when it comes to cash back. 

So, as someone who values travel, but wants the option of cash, is it better to roll the dice with the Chase Freedom and hope for premium travel redemptions or stick with a tried and true 2% cash back card? 

Playing the Odds – If we knew with 100% certainty that we could use the points with transfer partners, we would put our spending on the Chase Unlimited card.  If we knew with 100% certainty that travel would be limited for an extended period of time, and/or we needed cash, we would put our spending on a 2% cash back card. 

Problem is, we don’t have 100% certainty.

Given this lack of clarity, should we use the Chase Unlimited and hope for the best, or stick with the safe and sound 2% of a straightforward cash back card? 

To make the decision, we can apply a little math. 

chips points and miles

Placing Our Bet

We’re going to think in terms of “Expected Value”.  The Oxford dictionary defines Expected Value as  “a predicted value of a variable, calculated as the sum of all possible values each multiplied by the probability of its occurrence”. 

That’s a mouthful, and for those like me, who aren’t math inclined, it’s a little daunting!  But for the purpose of our discussion, notice that it’s a value which is calculated by taking into account the assigned “probability” of an “occurrence”. 

Applying Probability To Our Situation

So, let’s think about a possible occurrence. Our preferred occurrence is to transfer Ultimate points for premium travel on our next trip to Europe. What is the “probability” that the travel landscape will cooperate to make this occurrence, occur?

Let’s say we assign a 50/50 chance that we’ll be able to use the points for travel. A 50% chance that we can take our next big trip, and a 50% chance circumstances will result in redeeming our points for cash. In light of that assigned probability,  is it better to use the Chase Unlimited Card or our trusty 2% cashback card? 

Let’s do some math…

Scenario 1 Points and Miles

Scenario One – 50% Probability of Transferring Points, 50% Chance of Cashing Out Points

As a reminder, we’re valuing Ultimate Reward points at 2.25 cents apiece when used for premium travel. Furthermore, we‘re assigning a 50% chance of using the points for transfer partners, and a 50% chance of redeeming points for cash.   

Here’s what the math looks like      

Possible Outcome #1 (We Transfer Points) 1.5 points per dollar spent x 2.25 cents of value per point x 50% chance of it transferring points, equals a value of  1.688 cents per dollar spent

Possible Outcome #2 (We Cash Out Points) 1.5 points per dollar spent x 1 cents of value per point x 50% chance of it cashing out points, equals a value of .75 cents per dollar spent

The “Expected Value” of this course of action is the value of Outcome 1 + the value of Outcome 2, which is 2.438 cents per dollar spent

Which means, if we assign a 50/50 probability of using the points for a transfer partner, versus cashing them out, the overall expected value from this course of action is 2.438 cents per dollar spent.

So… it it worth taking a chance with the Chase Unlimited Card?

Yes. The expected value of using the Chase Unlimited Card is 2.438 cents per dollar spent.  The expected value of using a 2% cash back is 2 cents per dollar spent.  

2.438 cents a point > 2 cents a point

This means that if we assign the 50/50 probability noted above, the best “bet” is to go with the Chase Unlimited Card.  

Does that guarantee that travel will return and that we’ll get to use our points for high value premium travel? No. But that’s the point of equation, we are intentionally factoring in a 50% chance that we will not be able to transfer the points for a business class trip to Europe.  But even with the 50% chance of zero travel, the expected value of using the Chase Ultimate reward card is still 2.438 cents a point.  

Let’s look at another scenario in which we assign only a 30% chance of using the points for travel.

But for first, for the two people who may be interested in the mathematical details of the above calculation, here it is…

You can play around an E.V. calculator here.

scenario 2 points and miles

Scenario Two – 30% Probability of Transferring Points, 70% Chance of Cashing Out Points

Let’s say we’re less optimistic about travel returning to normal in the near future. We decide there is only a 30% chance that we transfer points for premium travel.  We assign a 70% probability of redeeming for cash. Does it still make sense to stick with the Freedom Unlimited, or is this the time to jump ship to a 2% cash back card?

Here’s what the math looks like.      

Outcome 1 (Transferring Points) 1.5 points per dollar spent x 2.25 cents of value per point x 30% chance of transferring points, equals a value of = 1.01 cents per dollar spent

Outcome 2 (Cashing Out Points) 1.5 points per dollar spent x 1 cents of value per point x 70% chance of cashing out points, equals a value of = 1.05 cents per dollar spent.

The “Expected Value” of this course of action is the value of Outcome 1 + the value of Outcome 2,, or 2.063 cents per dollar spent. 

Which means, if we assign a 30% probability of using the points for a transfer partner, the expected value from the course of action is 2.063 cents per dollar spent.  2.063 cents is still greater than 2 cents, but the gap is narrowing. In this scenario, we would still give a mathematical preference to the Chase Freedom Unlimited Credit Card, yet not by much.

At What Point Should We Switch to a 2% Cashback Card?

If we value Ultimate Reward points at 2.25 cents apiece, we should think about switching to a 2% card when we believe there’s less than a 27% chance that we’ll be able to use our Ultimate Rewards for premium travel. 

27% is the break even point. If the probability of using the points with transfer partners is greater 27%, we should increasingly go with the Chase Unlimited Card. If the chance of transferring points to travel partners is less than 27%, we should increasingly prioritize a 2% cash back card.

What If We Value Chase Points at 2%?

If we value Chase Ultimate Rewards points at 2 cents a point, we would need to assign a probability of 34% or greater, that we will use the points for premium travel with a transfer partner.  If we anticipate using it less than 34% with a transfer partner, we should increasingly favor a 2% cash back card. 

What If We Value Chase Points at 1.5%?

If we value Chase Ultimate Rewards points at 1.5 cents a point,  we would need to assign a probability of at least 67% that we will use the points with transfer partners.  If we anticipate using it less than 67%, we should increasingly favor a 2% cash back card. 

What if We Value Chase Points at 2.5%?

If we value Chase Ultimate Rewards points at 2.5 cents a point,  we would need to assign a probability of at least 23% of using the points with transfer partners.  If we anticipate using it less than 23%, we should increasingly favor a 2% cash back card. 

What if We Use a 3% Cash Back Card?

Instead of using a 2% cash back card, what if we swap it out for a 3% cash back card. (For example the first year of a Discover Miles IT credit card). If we value Ultimate Reward points at 2.25 cents a piece, we would need to assign a probability of at least 80% of using the points for premium travel via a transfer partner.  If we anticipate using it less than 80%, we should favor a 3% cash back card. 

Let’s look at two other questions that reflect in the math

What if I already have too many Chase Ultimate Reward Points? Could that alone let a person know to switch to a 2% cash back card. Yes.  It will also play out in the math.  Since they don’t need new points for travel, they would assign a 0% probability of using points for travel.  When they run the numbers, the cash back card will win.

What if I have significant money problems? Could that alone let a person know to go the cash back route?  Yes! They don’t need to run a calculation, but if they do, their need for money will play out in the formula.  There’s a 100% probability that you’ll need cash. When you assign a 100% probability, and 0% probability of using the points for travel, and run the numbers, the cash back card will come out the 100% winner.   

In Conclusion

Life is uncertain, but in the middle of uncertainty, we need to make decisions. Using a probability-based approach provides a way to quantify possible outcomes. 

As you can see, there is still subjectivity in the process. Each person will use their best guess to assign probabilities for each occurrence. Likewise, each person will supply a valuation for transferable points.  But even in light of this subjectivity, it can inject an element of structure in the decision-making process.

So…let’s circle back to the question: Should we use the Chase Freedom Unlimited and hope for the best, or stick with the safe and sound 2% of a straightforward cash back card?  

Based on our valuations, if we think there is a 27% or greater chance, that we will be able to redeem for premium travel, we should lean toward the Chase Card, the higher that percentage goes up, the greater we should value it. 

If we think there is less than a 27% chance that we will use the points for our next big trip, we should lean into cash.

What type of decisions do you need to make? Would applying a probability calculation help? Given your current situation, would you prioritize a cash back, or transferable, yet cashable currencies?


Appendix 1 – Our Valuation of Chase Ultimate Reward Points.  

We value Chase Ultimate reward points at 2.25 cents a piece when redeemed for premium travel via transfer partners. We don’t value Chase Points at 2.25% as an average for any and all uses. For example, Ultimate rewards can be used to…

A) Cash out at 1%

B) Book travel through the Chase Travel Portal, and if paired with a Chase Reserve Card, for 1.5 cents of value per point.

C) Transfer to Travel Partners and Book Non-Premium Travel

D) Transfer to Travel Partners and Book Premium Travel

We value Chase points at 2.25% only in the case of “D”.   

Interestingly, and in line with this article, If someone wanted to arrive at an overall value for Chase points, it would be possible run an Expected Value calculation.

  1. Assign your own probability of using points via scenarios A,B,C and D (Or add you own additional scenarios)   Make sure the probabilities add up to 100%.
  2. Assign a value-per-point for scenarios A,B, C and D.  Scenario “A” has a value of 1 cent per point. Scenario “B: has a value of 1.5 cents per point. That leaves assigning your own personal value to scenario “C” and “D”.
  3. Once you’ve assigned a probability for the occurrence of scenarios A,B,C and D. and assigned a value-per-point for scenarios A,B,C and D, you can run an expected value calculation. The result will be your own personal, overall valuation of Chase Ultimate Reward Points.

Appendix 2 – Cash Back Cards Versus Cards that Earn Transferable but Cashable Currencies.

This information was originally in the introduction of the post. But the post was already long, so we moved these thoughts to the appendix. It’s a snapshot of the pros and cons of cards that earn transferable but cashable currencies, versus cash back cards.

Factors We Value in Transferable, Cashable Points

  • The ability to transfer to travel partners
  • The potential to get a high value per point when used towards premium travel. 
  • The fall back flexibility of the cash out option. 

Drawback – If the “convert to cash” option is chosen, it’s hard to get a consistent, sustainable 2% value.

Factors We Value in a 2% Cashback Card

  • A consistent 2% cash back day in and day out
  • The option to indirectly use the 2% cash back to purchase points when the math makes sense.  

Drawback – Limited options for gaining outsized valued for premium travel

This Post Has 9 Comments

  1. Great article. Very timely. Glad Nick from Frequent Miler linked it. Will check out your other posts. Thanks!

    1. Thanks for stopping by and glad you enjoyed the article, it was a fun exercise to do.

  2. If you want to get very technical, I think you should include some sort of net present value to take into account devaluations. Your concept of transferring out to partners will be devalued in the long run.

    1. @BB Good comment. You’re correct. We could assign a net present value, that takes into consideration a discount for anticipated devaluation. Given all the unknowns in the world and in the travel industry, this could be especially relevant.

      We normally don’t hold more points than we anticipate using for that will be completed within a two-year period. This is slightly different than saying the points will be redeemed within 24 months. We generally book trips 11 months out, so our time frame for holding points may be closer to 13-14 months. That would give me a rough time frame to use for factoring in devaluation. Thanks for sharing the idea.

  3. Loved the clarity and detail of this article! I’ve spent these past two weeks determining what cashback v. UR pts v. TY pts. is personally worth to our family in anticipation of being able to travel 12 – 18 months from now, and this math is so helpful!

    1. Sounds like you’re thinking about some of the same things that we covered in the article. Sometimes it’s hard to decide what types of points to earn. But I guess that’s a good problem to have! Whatever you decide on, hope your family has a great trip.

  4. I wonder why didn’t you choose Citi DC card instead of Chase FU, since it gives an opportunity of both 2% or 2 transferable points. Also Amex BBP which gives 2x or can be cashed out at 2.5% cash back if you have Schwab card, albeit it’s high AF.

    1. Yugi, You bring up two really strong alternatives. We use both cards and find value in each. We’re writing a follow up article in which we address some other cards. People brought up cards such as the following:

      • The Discover Miles It card at 3%
      • The Amex Blue Business plus and cash out at 2.5%
      • The Citi Double Cash at 2%
      • The Bank of America card at 2.625%

      These are all great choices. We should be putting up the article in a couple days.

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