Should all manufactured spend go through American Express gift cards?

Earlier this week the BeFrugal shopping portal temporarily raised their payout on American Express gift cards to 2.2% from 1.5%. Several shopping portals (including my favorite, TopCashBack) periodically raise their earning rates on these cards, so many folks wait to buy their American Express gift cards until payouts are increased.

I don't write very much about American Express gift cards because I don't use them very much, but they're extremely popular, and for good reason.

Why buy American Express gift cards?

The argument for buying American Express gift cards is simple: they turn every credit card into a cashback-earning American Express card. Instead of just earning United miles with a Chase United MileagePlus Explorer card, you can earn United miles and 1.5% cash back.

If that sounds to you like it's too good to be true, then you're in good company! Lots of travel hackers find it worthwhile to direct much or most of their manufactured spend through American Express gift cards.

Why not buy American Express gift cards?

There are a number of potential issues to be aware of if you're considering using American Express gift cards:

  • The gift cards are (obviously) American Express cards. Some techniques for liquidation either don't allow American Express cards to be used, or specifically refuse gift cards for purchases (some Simon Mall locations are notorious for this). Plan in advance which merchants you'll spend the gift cards at;
  • The cards are shipped out activated and ready to use, and in my experience usually don't require a signature for delivery. If you have a day job, you may not feel great about having thousands of dollars left out on your doorstep all day.
  • If you order personalized cards, they can take anywhere from a few days to a week to ship and be delivered. You'll need to build that dead time into your strategy, and be willing to tie up the available credit on your cards for days with nothing to show for it;
  • Finally and most importantly, orders are often denied for little or, most frequently, no reason at all. After moving in May, I couldn't get a single order approved for months, although my approval rate has noticeably increased lately.

There is so much more to say about American Express gift cards, and fortunately most of it has already been said by Frequent Miler! Check out that page for a tremendously helpful resource.

Should all manufactured spend go through American Express gift cards?

In recent months I've done as much as possible to tighten up my own manufactured spending strategy.

First I should say that unlike many of my readers, I don't place a high value on my time, or rather, I don't treat manufactured spend as a time "suck:" I do much of my manufactured spend on foot, which makes it feel vaguely healthy; I listen to funny and educational podcasts while I work; and I'm always gathering more news and updates for this blog, increasing the value I provide my readers. So I don't feel the need to put a dollar cost on my time spent, since I love my job!

At the same time, I do put a dollar cost on my dollars, and aim to maximize the value I get from each dollar spent manufacturing spend. For me, that means using cards exclusively at merchants where my spend is bonused, while using my cash back cards at cheap, unbonused merchants and for American Express gift cards.

The interesting thing about American Express gift cards, however, is that just as you can impute redemption values by comparing a 2.22% cashback-earning credit card to a hotel's co-branded credit card, you can also impute redemption values by comparing your bonused earning rates to American Express portal payouts.

For example, when you use an American Express Hilton HHonors Surpass at a grocery store, you earn 6 HHonors points per dollar spent. When purchasing American Express gift cards through a 1.5% cash back portal, you earn just 3 HHonors points per dollar spent — and 1.5 cents in cash back.

In other words, your "bonused" earning rate allows you to buy HHonors points at 0.5 cents each, which is at the high end of the range of real-world Hilton redemptions.

When portal payouts on American Express gift cards are raised to 2.2% cash back, spending with your card becomes an even worse deal, allowing you buy HHonors points for 0.73 cents each. Realistically, you're not going to consistently redeem your HHonors points for that much value.

Within reason, more points are more valuable than fewer points

Everything I've said so far is true, and you can take a look for yourself at the numbers — and the potential problems I outlined — to see whether American Express gift cards make sense in your own miles and points strategy.

However, there's one final issue that's worth mentioning. As regular readers know, I'm the biggest advocate of earning only as many miles and points as you can reasonably expect to redeem, since an unredeemed mile is worse than worthless: it actually cost you the cash back you could have earned instead.

At the same time, within reason, at the margin points become more valuable the more you have of them: 12,499 Delta SkyMiles can't be redeemed for travel, but 12,500 can. In that situation, the last SkyMile you earn is in a concrete way the most valuable SkyMile, since it unlocks the value of all the other ones!

How about a concrete example? I have an upcoming Hilton stay I'm currently saving up HHonors points for:

  • I'll redeem 200,000 HHonors points for a 5-night stay in New Orleans that would cost $820, or roughly 0.41 cents per HHonors point;
  • At 6 HHonors points per dollar spent, that's more valuable than a 2.22% cash back card;
  • But if I instead earned 3 HHonors points per dollar spent on American Express gift cards, I'd fall short of the 200,000 HHonors points I need to receive the 5th night of my stay free, and have to pay 50,000 HHonors points per night instead;
  • 3 nights would cost 150,000 HHonors points and I'd be saving $492 for those three nights, a redemption rate of just 0.32 cents each.

I'd be better off using a 1% cash back card!

Note that these numbers are specific to my own situation. That's exactly why I preach that miles and points shouldn't be earned speculatively, but rather with specific redemptions in mind.

Of course, the other possible conclusion you could reach is that Hilton HHonors points just aren't very valuable!