Choosing an airline rewards card
August 05, 2009
If you've flown recently, you've probably run into some sales associates hawking airline reward credit cards. Air miles cards might seem like a good value, especially if you'd like to use some reward miles to cover the cost of an upcoming trip. However, I can think of at least four strong reasons why you should be wary of credit cards that offer airline miles as rewards.
1. The Ailing Airline Industry Wants You to Pay for Your Tickets
Airlines have taken knocks in the press lately for hiking fares and adding a laundry list of fees. One airline has even announced that it would charge a transaction fee to customers who try to pay unexpected fees in person at the airport! It's not surprising, then, that carriers have scaled back frequent flyer programs.
For example, some airlines that once offered round trip travel at 20,000 miles now require 25,000 miles for the same destination. Also, airlines can even require fees to maintain a balance from year to year. Carriers compete on price more often than on loyalty these days, making most frequent flyer credit cards beneficial only to true road warriors (many of whom probably prefer to stay home when they're taking time off).
2. Redemption Fees Clip the Wings from Frequent Flyer Airline Programs
Even if your purchasing patterns suggest that you could earn enough frequent flyer miles to make a reward credit card worthwhile, check the fine print. Some credit cards may charge a redemption fee to transfer your reward points into actual frequent flyer miles. Moreover, most generic airline reward cards that are not branded with a particular airline won't even allow you to transfer your points to your existing frequent flyer mile accounts. You could also even be "double-dipped" by an airline that charges a ticketing fee when you want to exchange your miles for a flight!
3. Steep Costs Ground the Added Value of Airline Credit Cards
Airline reward cards feature some of the highest annual fees and highest interest rates of all credit cards. Although marketers at the airport might try to tempt you with "added value" features, like upgrades to elite status or no blackout dates, annual card fees as high as $100 can make a typical traveler feel less than valuable. You may be among the minority of Americans who charge enough to justify the cost of all those perks, but definitely do the math.
Here's a quick scenario to consider. If you are only spending a $1,000 a month on an airline miles card that has an annual fee of $80, it will take you over 2 years to earn a free ticket (assuming that you have to earn 25,000 points for a roundtrip ticket). During that time, you will be out $160 in fees (2 years X $80). If the cost of your flight is $250, the true value of your $250 ticket is only 90 bucks ($250 less $160). Obviously, not exactly a way to get rich quick or slowly for that matter.
4. Cash Back Credit Cards Will Likely Get You There Sooner
Fortunately, there's a less expensive alternative that can still help you cover the costs of that dream vacation. A few cash reward credit cards, like cards offered by Charles Schwab and Fidelity Investments, offer 2% cash back on all purchases. In the scenario just described above, you would have earned a generous cash rebate of $500 ($25,000 X 2%) had you used a cash reward card.
Considering the additional fact that very few cashback cards have annual fees, it's easier and quicker to take that dream vacation to Hawaii using a cashback card. Not only will your card rebate likely be higher, you have more choice. For example, you can use your cash rebate to pay for discounted fares on any airline you choose to any destination you prefer. Or you could use your cash reward for any other purpose under the sun.
The bottom line is that if you want to get to your destination quickly and inexpensively, paying with a cash rewards card is the best way to go. You control your itinerary, not the airline, and you avoid a lot of fees in the process. Simply put, "cash is king" my friend (particularly in this environment)!