Travel credit cards can work wonders, especially to us who day dream of finally taking that European tour or spending a week or two at a destination resort somewhere in South East Asia. The question is, how? And the more important question – how much?
I would assume you’ve already seen at least one story online about this dope guy who’s traveling the world for less or even for free just by applying for several travel credit card programs and maximizing the benefits of each, vowing to never spend a single cent on anything that wouldn’t add a point to his already fat points wallet.
If he can do that, so can you (or I, for that matter), right? Yes definitely, you and I can.
But while we are daydreaming of hacking the system by conning credit card companies of its benefits, taking advantage of the loopholes and being able to travel to Paris for free this coming holidays, these same companies are busy in the background, vigilantly trying to get ahead of our spending habits, making sure they earn back everything they’ve given us (if not more).
Now the travel hacking by the credit card holders and the vigilance of the credit card companies are normal healthy habits that keep the travel cards industry alive, but how can we – the consumers – stay on top of this game?
If you are just thinking of getting your own travel rewards credit card, or if you already have but are looking for ways to actually take advantage of the perks and benefits of having one, then I think you’ll get some useful pointers from this post.
First off, how do travel credit cards work?
Unlike other type of credit cards, travel cards gives benefits that help its holders to save on air travel and hotels, on top of many other travel related benefits. Some cards offer points to a specific airline or group of airlines, some offer points specific to a hotel chain, and there are also the general type of credit cards where you earn points and you get to choose where to spend those points on.
Travel rewards cards offer points to those who spend, which can be cashed in for highly discounted or free flights and hotel stays, upgrades, cash backs, free or reduced baggage fees, priority boarding, and other perks.
On top of points that you can exchange for travel freebies, there are travel credit cards that has fixed perks that doesn’t require you to spend at all, like free unlimited airport lounge access, travel and auto rental insurance, checked bags, priority boarding, and many other freebies.
Those are some cool benefits, right? With all those sweet perks, let’s take a look at how the credit card companies manage to stay afloat and still keep in those profits.
These are the fees that just won’t go away. Whether you actually use your credit card during the year or not, this yearly fee is staying for as long as you have it. The Annual Fee (ranges from $95 and can go as high as $1,000) is also used to offset the costs of maintaining and administering your account, and also covers for a bit of the cost of your card benefits like free airport lounge access.
Top travel cards charge annual fees that require high amounts of travel or other spending to offset them via rewards. To encourage sign ups, most credit cards waive the first year’s fee, and then start the charging right after.
Does “50,000 bonus points after you spend $4,000 on purchases in the first 3 months from account opening” sound familiar? This might sound really inviting at first – after all, your instant 50,000 bonus travel points can already get you a one-way Suite Class flight ticket on Singapore Airlines for 51,000 KrisFlyer miles (just add 1,000 more points), round-trip economy flights to Europe for 42,500 Virgin Atlantic miles, or one night at the ultra-luxe Ritz-Carlton for 50,000 Ritz-Carlton Rewards points.
Just look at those benefits you can instantly get just by signing-up. What can go wrong, right?
Well, with all those blinding perks, you might already not notice the fact that you have to spend thousands of dollars in the first few months of opening your account. We all know that with groceries, gas, and stuff, it can be easy to spend that amount on your credit card in just a few months. But remember that not all purchases qualify and that monthly rent of yours – you cannot pay for it by credit card.
So having the need to spend $4,000 via credit card in just three months can mean yourself going on a buying spree on stuff you don’t actually need but have the justification for (the 50K miles), and then ending up having to pay interest for the balances with each month you are unable to fully settle your debt.
Great. As you can see, sign-up bonuses may encourage you to spend more just to qualify for them.
Travel rewards credit cards tend to have higher-than-average interest rates on your purchases, so carrying a balance in each month has the potential to actually cost you more than any rewards you might earn and enjoy. Purchase interest rates (APRs) for travel credit cards fall on the higher end of the scale for all credit cards, and the credit score needed to secure them starts in the upper 600s. Qualifying credit scores on the lower end of the spectrum will, in turn, result in higher APRs.
Given the above, are credit card holders maximizing their use of these travel credit card perks?
Let’s take a look at this survey by U.S. News, who ran a nationwide survey through Google Surveys between April 17 and April 19, 2017. The survey polled 1,278 American people who own travel rewards credit cards.
The results are staggering, mainly due to the fact that almost half of travel rewards cardholders don’t take full advantage of their cardholder benefits.
While thirty-three percent of survey respondents earned more than $500 in lucrative rewards in the last year – the most popular benefit enjoyed were free domestic flights, followed by cash back, followed by free nights at a hotel – many cardholders are not aware of their annual fee or how to take advantage of their card benefits.
It’s also very interesting to note that more than half of travel credit cardholders surveyed carried a monthly balance in the last year but only nearly half of travel rewards cardholders don’t take advantage of cardholder benefits, potentially negating the rewards they have earned.
Cardholers may have taken advantage, but since more than half of the respondents carry balances, it’s very likely that these people have paid up more on interests and annual fees than the actual value of the rewards they have enjoyed.
So it seems that no matter how baffled we are at how travel credit cards stay afloat given how huge their spendings are on top of the cost of perks, the industry is making money from us. Lots of it.
So how do we stay on top of the game? How can we make sure we are getting the most of the benefits we are entitled to after paying for the expensive annual fees and interests, if any?
The key here is to manage and balance your credit card spending versus the benefits you enjoy, and choose a credit card that aligns with your spending habits and your lifestyle as well.
For you to maximise your use of travel rewards and perks from your travel credit card:
You must travel frequently.
The exorbitant annual fee you pay just to maintain your travel credit card must be justified. If you travel very frequently, there’s a big chance you are able to use that free airport lounge access and other perks very often, which should justify the annual fees you’re paying for.
If you don’t consistently spend on airfare, hotels or other travel expenses, consider a cash back credit card instead. They have fewer limitations on redemption and might save you the cost of an annual fee.
You must pay off your balance each month.
Because travel credit cards can have higher-than-average interests, you should only get a travel card if you can pay off your balance each month. This way you avoid having to pay for interest with each month, and you only get to enjoy
the priviledges of having a credit card.
You must stay informed.
For you to fully reap the rewards of your travel credit card more than the annual fee that you’re paying for, make informed decisions. First off, check if the annual fee is right for your budget, and if you can really afford such annual fee.
On top of that, you must pick the right rewards program for you. Should you get an airline specific, hotel specific, or general credit card? of course, this will depend on your lifestyle and preferences so you must pick what suits you best.
Factor in the earning potential and calculate the redemption value of each credit card you’re choosing from. Ask yourself: which type of purchases earn you a point? Also if your goal is, for example, to get a free round trip first-class ticket to Tokyo from New York City, then check with each credit card option how much spending from your end it would actually take before you are able to redeem that kind of trip.
Cheers to making informed decisions! As a complement to this post, you might want to check out how some credit card holders are sleeping peacefully at night by avoiding debt.
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