In the first part of this series on effective accumulation and use of Frequent Flyer points, we talked about how to earn points more effectively. <recap>. Today, we investigate whether it is worth buying points. Either from the airline or by paying a fee to the merchant.
Part 2: Should you pay a fee to use your card?
In the previous article, we looked at heaps of opportunities for business owners to pick up significant quantities of Qantas or Virgin points that could see them taking their families to Europe, every year, for free. In business class or better.
But what if you want even more points? What if you could use your credit card to pay for almost any business expense? ATO? New cars and machines? Business premises rent?
And what if there was a fee for doing so? Is it worth it?
Starting 5 August, it gets more expensive to use points on Qantas. But there will be more seats, lesser demand and more airline partners to use the points with. Even more reason to have lots more points!
So, it all depends on the size of the fee and how many airline points are ultimately earned. How do you know if the merchant charge is good value? There are heaps of people out there paying fees for very little benefit.
Well, it helps if you can determine a value for an FF point.
1. What is a point worth? How much is the maximum you should ever pay for points? How do you value a point?
The best value for the use of your points is probably an international airline ticket in your class of preference. If you look at the cash price of that ticket relative to the equivalent points for the same seat, then you have a basis for putting a price on a point.
So, if your airline charges (for example) $11,200 for a return business class ticket (including taxes and charges) to London and the equivalent points required to fly there is 300,000 plus $1,200 taxes, then the theoretical value of these points is $10,000 / 300,000 or 3.33 cents per point.
That sets a good benchmark.
We have long had a rule that the maximum price to pay for one point should never exceed 3 cents. And 2 cents is much better. We also love free, but that was the previous article.
Of course, if you get a tax deduction on acquiring the points in the business (and those points are tax free and belong to the business owner) and a cash airfare (being for private purposes) would be after tax, then that makes the points more valuable. Perhaps up to 4 cents per point. For some of our clients, it could be even more.
Of course, the price of the ticket fluctuates by season, sales and availability. Taxes differ depending on destinations. Even the points required change according to availability and the type of ticket you buy. If you can even get one!
2. Should you buy points from your airline?
Qantas will sell you points to top up your balance if you are short. You can buy 1,000 to 150,000 points and the price varies depending on the quantity you buy.
The price varies from 3.88 cents per point for a 10,000-point purchase, through to a more reasonable 2.73 cents per point for a 100,000-point purchase. Of course, this is not tax deductable.
This later price just falls within the rule of thumb above and might be used to top up points should a purchase opportunity for an award ticket be a little beyond your point balance.
3. Pay a fee to a merchant for buying goods and services.
In the last article in this series, we looked at the points earned by different cards. They varied from a high of 1.25 airline points per $1 spent to a low of 0.5 points per $1 spent. Spending on Government (such as the ATO) is usually half that again.
Depending on your choice of card and whether you get a tax deduction, it may or may not be worthwhile paying a fee.
4. Pay your tax on credit card.
Yes, you can do this directly with the ATO or with an intermediary. They have different charges.
a. Directly with the ATO. Amex charge is 1.45% and Visa/Mastercard is 0.72% or 0.8% respectively.
b. Alternate providers to use the Amex. There are other providers in the market that can make this payment for you, and they charge different fees. The one we have used is SNIIP. They charge $219 for a $10,000 payment.
| Visa* direct with ATO |
Amex direct with ATO | SNIPP Amex QF Ultimate | SNIPP Amex Platinum | |
|---|---|---|---|---|
| Tax Payment | $10,000 | $10,000 | $10,000 | $10,000 |
| QF Points | 5,000 | 5,000 | 12,773 | 11,496 |
| Fee | $80 | $145 | $219 | $219 |
| $ for 10,000 points | $160 | $290 | $171.50 | $190.50 |
| Effective cost | 1.6% | 2.9% | 1.7% | 1.95% |
| Upside | Cheap points | Still Inexpensive | Mid value & side benefits | |
| Downside | Low Spending Cap. Credit Card limits. | Possible Spending Cap & Poor Value | 100,000 points cap per year | No Cap Expensive Card |
The effective cost varies between these cards. ATO is good value is some cases, the intermediary in other cases. As discussed last article, it is the airline points ultimately earned that matters … not the apparent points earned by the card.
*NOTE: Visa used for calculations is NAB Qantas Business Signature Card. Not all Visa cards provide these many points. Some only a fraction.
5. Conclusion
Want 300,000 points to fly to London?
Pay the ATO using your NAB visa credit card or SNIIP with your Amex Ultimate card and the 300,000 points (yes, plus taxes) needed to fly to London will cost you $4,800 or $5,145 with that Amex Ultimate.
If these points are also tax effective for you (and business owners have this opportunity) and your personal tax rate is 47% (plus Medicare), the real cost is around $2,400.
Wow. Got your attention?
6. Do your homework.
This is an ever-changing world, and providers are always changing the rules, the earn rates and the conversions. Offers come and go. Cards that were once good can quietly halve their value overnight. You need to remain vigilant.
Whilst this article is a guide to understanding points, you still need to check this out for yourself.
7. Next Time …
Part 3. Getting value for your points.
Yes, don’t waste your points on toasters!