How important is diversifying manufactured spend?

I often highlight a concept I like to call "imputed redemption values:" the dollar cost of a hotel night (after taxes and fees) that makes it worth redeeming that hotel's rewards currency instead of Barclaycard Arrival+ miles earned by manufacturing the same amount of spend and earning the equivalent of 2.22% cash back, when the miles earned are redeemed against travel purchases.

These imputed redemption values are an attempt to synthesize three values: the earning rate of a hotel chains's co-branded credit card; the number of hotel points required for each property in that hotel's portfolio; and the amount of cash you would earn putting the necessary manufactured spend on a 2.22% cash back card instead.

For example, here are the imputed redemption values I generated for a Hilton HHonors member manufacturing spent with an American Express Surpass card at gas stations and grocery stores:

It's important to note these are break-even values: if a hotel room costs 40,000 HHonors points or $148 after taxes and fees, then the exact same amount of manufactured spend is required, whether it's on a Surpass American Express or Arrival+ MasterCard. As a 40,000 point room gets more expensive, HHonors points become a better value, and as it gets cheaper, Arrival+ miles become a better value.

At the exact imputed redemption value, your decision will depend on your own balances: if you have been inadvisedly stockpiling HHonors points, you should be eager to cut your loses and redeem them, while if you're saving up HHonors points for a future high-value redemption you might lean towards redeeming Arrival+ miles instead.

Should you strongly prefer cash over loyalty currencies in general?

I've been thinking about this question lately in two contexts.

In the comments to my recent post on using American Express gift cards, reader Brown wrote:

"However the most important thing is it shifts away my spending on Arrival+.

"I have a long list waiting to be redeemed on my Arrival+, like car rentals and hotels using points& cash. I believe Barclay cannot allow huge spending on their card, unlike Amex. I try to keep it below 12k each month."

Meanwhile, on February 4 Frequent Miler reflected on the opportunity cost of manufacturing elite status instead of cash back. He wrote:

"Unless you value Diamond status at more than a few hundred dollars, or you value Hilton points more than I do, I don’t see manufacturing Diamond status as a great opportunity. In this analysis, the value of the earned points and status are maybe equal to the opportunity cost. That’s not enough, in my book. As a rule of thumb, I believe that you should value the earned points and benefits much more than the opportunity cost, to make it worth doing." [emphasis mine]

These are directly opposite conclusions based on the same set of facts:

  • All else being equal, cash is usually preferable to hotel points;
  • But all else isn't equal — different cards are used to earn each, and there's an inherent value to spreading manufactured spend over more cards rather than fewer (within reason).

Is there a way to thoughtfully resolve this contradiction?

Why use less lucrative cards to begin with?

I think Frequent Miler is begging the question when he insists that cash is better than airline or hotel rewards currencies. He says you should prefer cash, but you already prefer cash. The only reason you'd find yourself earning hotel points or airline miles is that you've already exhausted all your most-rewarding cash-back-earning credit cards.

After all, the "new old Blue Cash" only earns 5% cash back on up to $50,000 in purchases per year — that's just over $4,000 in spend per month. Assuming you have access to more manufactured spend than that, at some point you're going to have to decide which cards you want to put the rest of your manufactured spend budget on.

In other words, you're going to run out of supercharged cards to manufacture spend on. You'll hit annual spend limits or, failing that, realize that your card issuers aren't going to let you run up multiple times your credit limit each month forever. But unless you want to stop manufacturing spend, you're going to need to dig deeper into your credit card portfolio.

That's the point where you'll need to make a conscious decision about which cards to put additional manufactured spend on, and it's at that point metrics like imputed redemption values can aid in your decision making.

For that marginal manufactured spend, whether it's $10,000 or $100,000, you should try to put spend on the cards that most closely approximate (or, ideally, exceed!) your highest-earning, unlimited cash back credit card (in my analysis the Barclaycard Arrival+ MasterCard), while not drawing additional attention from any one card issuer.

Conclusion: diversify purposefully

You shouldn't manufacture spend on a Hilton HHonors Surpass American Express just because I do, or just because it has, along with the Club Carlson Premier card, one of the most favorable imputed redemption value structures.

If you decide to manufacture spend on those cards, and others, you should do so because you find the value you receive from redeeming those rewards currencies competitive with the value you receive from your Barclaycard Arrival+ card, and you've reached your comfort level with Arrival+ spend.