Let your credit take flight!
With all the travel options and available programs to earn free miles, it may seem natural to jump on board with your own mileage earning credit card. But before you take off, take a step back and carefully evaluate the situation. Earning free miles with an airline credit card may or may not be right for you. Consider the following:
Is a Mileage Reward Card for me?
- Am I a frequent flyer or a frequent buyer?
- What are my traveling habits?
- How long will it take me to earn a free ticket?
- How often do I use a credit card?
- Am I going to carry a balance on this card?
Which Mileage Reward credit card is best for my lifestyle?
- What major airlines fly in and out of the airport I use most frequently?
- Where do I travel most often?
- Can I combine the points I earn with my frequent flyer program?
- What is the cost (rewards minus fees) for carrying one card over another?
- Who are the other partners associated with the card with whom I may redeem points?
Doing the math
- Divide the standard level for reward (usually 25,000) by the amount you charge annually to determine how many years it will take you to earn a free ticket.
- Multiply your annual fee by the years it takes to earn your reward (calculated above), and add any interest earned on outstanding balances to determine the cost of the reward.
- Subtract that cost from the price of buying a ticket to determine the true value of the reward. In some cases, it won't make sense to work for a reward.
Frequent Flyer vs. Frequent Buyer
Tim Winship, publisher for FrequentFlier.com, divides the world into two categories—frequent flyers and frequent buyers. He says the quickest way to earn miles is to fly and use an airline FFP. So, if your lifestyle allows you to travel often, you may want to supplement a FFP with an airline affiliated credit card or an American Express (Amex)/Diners card, which allow you to combine earned points with FFP points.
On the other hand, if you are a bigger spender than flyer, think about using a bank card that is not branded with a particular airline. They offer lower annual fees and interest rates, a variety of airlines to choose from, and you may not be limited by airline capacity controls and blackout dates. There are several attractive cards that offer reward points for purchases and a few even have no annual fees and 0% introductory interest rates.
In addition, you may be able to earn other rewards with bank cards, such as a discounted airline ticket or reward with a participating partner, for fewer points. Keep in mind that the industry standard for earning a free ticket is 25,000 points (in other words you will normally have to charge $25,000 to your credit card before earning a free ticket).
Gary Foreman, editor of The Dollar Stretcher, says it is also important for not so frequent flyers to keep in mind the times of year they are most likely to fly. Will it be over the holidays when you may face a higher chance for blackout dates? Do you travel as a family? If you are trying to earn free tickets for everyone, it will take much longer or more spending. Plus, a child's ticket is the same rate as an adult ticket if purchased as a free reward. If you are not going to be able to use earned miles it may be best to consider other options.
Fees, Fees, Fees
Fees tend to be higher for airline reward cards than other types of credit cards. If you don't charge a lot on your card, then the high fees may cancel out any reward benefit.
Greg McBride, Senior Financial Analyst with Bankrate.com gives the following scenario: If you spend $5,000 a year, earn 1 mile per dollar, and pay a $50 annual fee, then it will take you 5 years to earn a free, domestic roundtrip ticket. But, if you consider the annual fee you paid to use the card, then the ticket has really ended up costing $250, a price you could have paid with many discount airlines.
Consider too the option of a cash back reward card with no annual fee. If you spent the same $5,000 a year and earned 1% cash back, you would earn the $250 to pay for a ticket and not have spent any extra money on fees. In addition, cash can be used anywhere and will not lose its value—unlike miles which could lose value if a program suddenly decided more points are needed for a free ticket.
Of course, the fee may be a nominal consideration if you are able to spend more each year and combine your miles with a FFP making it easier to earn a free ticket in a shorter amount of time. You may want to consider charging monthly, routine expenses such as groceries, gas, and utilities to increase the amount you charge and therefore earn each year.
Interest Rates
According to McBride, the cardinal rule for airline reward cards is to never carry a balance because the interest rates tend to be higher. If you plan to carry a balance, then your top priority should be finding the lowest interest rate credit card, with or without the reward attached. Consider that the payout for reward credit cards is generally about 1%, so you end up losing money if you are also paying 15% in interest and an annual fee.
Expiration Date
In the United States , most programs don't have expiration dates for earned miles. Sometimes they require the account have some activity over a three year time frame. Read the fine print and make sure you understand the exact requirement for your program.
If you are enrolled in a program outside the United States , expect your miles to expire three years after earned. Again, read the fine print for any details regarding exact requirements.
Using and Losing Rewards
Winship says that in today's market it is important to use earned miles as the threshold for a free ticket is reached because if an airline fails it is unlikely another airline will step in and allow you to still use them. This is because so many airlines are in financial difficulties that absorbing these miles is too high a risk. You also never know when the rules of the game will change making the reward level higher. So, instead of saving all those miles for retirement, go ahead and take that trip this year.
Other Important Tidbits
Watch spending with an airline reward card, says McBride. Avoid falling into the trap of spending more just to earn the reward. Earning the reward should be a natural benefit based on your current, actual spending habits. Free reward tickets are taxable if earned during business travel and used for personal, leisure travel.
Consolidate, consolidate, and consolidate. Miles spread out over various airlines, cards and FFPs will never get you your desired reward.
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