This week on The Money with Katie Show, we’re revamping our patented (okay, it’s not patented, but it should be) travel rewards strategy for 2023. And lest you distrust the personal finance wench’s hot takes on travel rewards, I’m bringing in the big guns: Benét Wilson, former senior editor for The Points Guy. 

But how do you know when to redeem your points, or when you should pay cash instead?

Ideally, the answer is, “All points all the time, because I have millions of them!” But for those of us who haven’t crossed the 7-figure points mark, a little strategy and #math is involved.

When to pay with cash

The magic number you want to isolate to make this decision is called the redemption value. Luckily, all you need is:

• A 4th grade understanding of long division

• The price in points

• The price in dollars

Once you’ve got that, you want to run the following equation:

[the cost of the flight or hotel in dollars] ÷ [the cost of the flight or hotel in points] = the value of each point for this transaction, which tells you whether or not it’s a good time to use your points

Let’s pretend you’re debating between spending $200 on a flight or spending 18,000 points on Southwest, where Rapid Rewards points are valued—on average—at about 1.5 cents apiece.

$200 ÷ 18,000 = your 18,000 points are worth 1.1 cents/each.

So what do you do? 1.1 cents per point isn’t a great redemption value—remember, the average value is about 1.5 cents. 

Now, what would happen if you paid $200 for the flight?

You could earn an additional 1,500 points by buying the flight with cash, which would (on average) be worth about $22.50 in the future when you redeem them (1,500 points * 1.5 cents average = $22.50). 

If it’s really close and you’re torn, you can treat those earned points almost like “money off”: $22.50 in points makes your $200 flight’s net cost $177.50. In that way, it’s like you’re comparing spending 18,000 points vs. $177.50. 

In situations like these, it really could go either way—if you have tons of points (and a Southwest Companion Pass), it’s probably not a big deal. But if you have, say, 20,000 points total, this might not be the most worthwhile flight to spend them on.

Here’s the average value per point for the major loyalty programs we covered on the show this week

• Chase Ultimate Rewards: 2 cents per point

• American Express Membership Rewards: 2 cents per point

• Southwest Airlines Rapid Rewards: 1.5 cents per point

• United MileagePlus: 1.21 cents per mile

• Marriott Bonvoy: 0.84 cents per point

But there’s another factor to consider: While it’s not a hard and fast rule, generally speaking, you’ll achieve much higher redemption values by transferring points from Chase Ultimate Rewards or American Express Membership Rewards to a partner hotel or airline than you will booking travel directly in the credit card rewards portal. 

You’d think the numbers would be similar, but they can actually vary substantially: A Delta flight might cost 30,000 Membership Rewards points in the American Express travel portal, but only 18,000 Delta points. Transferring your points to Delta (rather than booking directly in the portal) can change the calculus of whether or not the redemption is “good.” 

When to pay with points

Let’s say you’re perusing the Chase Ultimate Rewards portal for a hotel room and you stumble across a room that costs either $266 or 21,820 points (I pulled this example for the Residence Inn by Marriott in Big Sky, Montana, because I’m trying to drop hints to the universe that I really want to go).

Using our earlier formula: $266 ÷ 21,820 points = about 1.22 cents per point

Hmph. This isn’t great, especially for Ultimate Rewards points. 

Let’s try another hotel from the same list: $354 ÷ 25,512 points = about 1.4 cents per point

That’s a little better! Anything encroaching on 1.5 cents per point is usually fine by me. As we’ve already hinted, a lot of the value assigned to the “average” Ultimate Rewards points value comes from the fact that they can become ludicrously valuable when you transfer them (like to a partner airline for a flight worth $1,400 for 35,000 points, making the flight redemption value worth a whopping 3.7 cents per point). 

Where you’ll probably find the most extreme discrepancies between points & dollars

The American Express Membership Rewards and Chase Ultimate Rewards portals will usually have (relatively) consistent ratios. In other words, you probably won’t often find situations in which the points are worth a lot more than the standard two cents each.

One thing to note: The AmEx Platinum Card’s Fine Hotels & Resorts Collection does make certain redemptions extra valuable, since the booking comes with so many more perks (resort credits, free breakfasts, late checkout, etc.).

Where you’re more likely to see point values fluctuating is when you directly book with the hotelier or airline. This is because the airlines and hotels offer peak and off-peak pricing models, in a lot of cases.

In other words, if you’re looking at Hyatt, you know you’ll always be able to find a “Category 1” hotel for, say, 5,000 points per night, and that the most you’d ever spend for a “Category 4” hotel is 90,000 points/night.

Without standard award charts like the example above, a flight or stay could cost as little (or as much) as the vendor wants for reasons we’ll never know, which makes it less predictable (and usually, more expensive).

Making sense of the complicated algorithms that determine what things “cost” in Points & Miles Land

The weird thing about this dilemma—when to pay with points and when to pay with cash so you can earn more points—is that while we can usually analyze these decisions in a pretty straightforward way, it can be a little…emotional.

I’ve found myself agonizing over whether I should burn the points on a certain trip or just use “real money,” even when I’m looking at a good redemption value, just like I’ve found myself burning points like they’re Monopoly money when I knew the redemption value wasn’t all that great.

Oftentimes the financial context of our life from month to month can impact this decision. If you’re already over budget, it can be painful to tally another few hundred bucks in the Travel category when your points bank is sitting there staring at you from Loophole Central. It’s not always cut and dried (even when it technically should be).

In summary

Your best bet is to use the “dollars divided by points” equation every time and determine if the redemption value is strong compared to what the geniuses of the internet say is the average.