A few weeks ago, when an opportunity arose to buy Mastercard Gift cards (MGCs) at-cost (i.e. without the activation fee), Esther and I got into a discussion about whether to buy those MGCs with a points-earning (Alaska Airlines Visa) or cashback (Fidelity Amex) card. To add some color, I was having this conversation on my phone from the Las Vegas strip, with my family asking just who I was so busy texting ;).

In either case, the credit card rewards are ‘free’. We can buy the MGCs at cost ($500) and liquidate them without loss (i.e. for $500), so we trade nothing but our time for the rewards we each get. As for me, I’d get $10 cash back per card, and for Esther, she’d earn 500 Alaska (AS) Mileageplan miles.

However, there is an opportunity cost to each of our rewards (more on opportunity cost here and here), namely, the rewards that we could have gotten by using a different card. My opportunity cost is 500 AS points, and Esther’s opportunity cost is $10.

Assuming that both options are valuable enough to us that it’s worth our time to go buy and liquidate the MGCs, we therefore need to use opportunity cost in determining which of the two alternatives to choose. And the answer boils down to not how much a AS mile is worth to either of us, but what we’d be willing to pay for it.

In our conversation, Esther said to me that she’d never seriously consider buying miles at more than 1 cent/mile (cpm). My contention, then, was that she should take the cash. Why? Let’s assume that outside the context of this deal, I handed Esther ten, crisp, one-dollar bills. Then assume Michael comes along and offers to sell her 600 AS miles for $10. Esther declines, because she had just finished explaining to me that she wouldn’t pay more than 1 cpm for AS miles, and in this case, she’d be paying $10/600 = 1.67 cpm.

Given this outcome, using her AS credit card instead of the Fidelity Amex to buy the MGCs would be an even worse deal, because it’s like she’s being offered only 500 miles for $10 instead of the 600 miles that Michael had offered. She would be buying AS miles at $10/500 = 2 cpm. Moreover, AS (and other airlines) routinely offer bonuses on the purchase of miles, often bringing the cost down to 2.1-2.3 cpm. In that case, I’d rather have the cash now and buy the miles when I know I need them (i.e. have a redemption in mind) rather than purchase speculatively at 2.0 cpm.

Now, given that the 500 miles are free (everything has an opportunity cost, but ‘free’ in this case means that it doesn’t leave you worse off), neither choice is bad. In fact, as Esther pointed out, arguably she would get more enjoyment out of the miles because spending cash is psychological expense regardless of the source, whereas spending miles for that same thing would feel much more like getting that thing for free.

Maybe I should have just taken the cannoli…