This is a guest post by Ken Myers, a father, husband, and entrepreneur. He has combined his passion for helping families find in-home care with his experience to build businesses. You can learn more about him by visiting @KenneyMyers on Twitter.
Rewards cards with bonus signup miles can earn you a free flight but are designed to prevent you from completely taking off. Knowing the pitfalls between your spending and a complimentary upgrade to business class will let you maximize miles while keeping your credit intact.
Be Interested In Rates
When you borrow money on even the best airline credit cards, interest rates often average 4.4% more than cards not offering points. This means you are spending more money with each swipe in order to points if you’re making full monthly payments. Over the span of a year, it is quite possible to spend more in interest alone than it would have been to simply save for a given trip.
Being Beat By The Bonus
When you are approved for a rewards credit card, most will require you to spend a certain minimum amount – ranging from $250 to $3,000 – within 3-6 months to qualify earning a signup bonus. What many people don’t put into consideration is use of a card under these restrictions can devalue those rewards, in terms of the interest costs. As I mentioned above, it is incredibly easy to surpass the value of a plane ticket if you have to pay high interest on your purchases. That “free” flight you are planning on might cost you much more than it would by paying upfront, as you can see in this chart on Airfairewatchdog.
Mind Your Cents Per Mile
Many airlines, including the three alliance programs you should sign up for, allow you to purchase additional miles to pay for flights, hotels and fine dining. When you compare the cost of miles on various airlines, any perceived savings might be negated.
For the sake of argument, assume that you’re going to travel from Denver, Colorado to Long Beach, California for a family visit. On Delta Airlines’ SkyMiles program, a round trip ticket would cost 50,000 miles plus $10 in fees and taxes. The Gold Delta SkyMiles rewards card you signed up with requires $1,000 be spent within the first 3 months in order to receive a 30,000 mileage bonus. Once acquired, the program rewards 30 miles for every dollar you spend. This means you need to spend an additional $667 in order to earn enough miles for this trip. You also need to consider the $95 maintenance fee for the card for every year after the first.
Now, assume your credit score puts you in the mid-range for this card – a 17.24% interest rate on purchases. After spending the $1,667 in order to achieve 50,000 miles, you could pay $475 in interest if your monthly minimum payments are $60 each – taking you three years to pay off. If you keep the card the entire three years, the total cash you would need to invest is $2,342:
- $1000 initial spending in three months to get 30,000
- $667 spending to earn 20,000 miles
- $95 in maintenance fees per year for two of the three years it takes to pay off the card, or $190
- $10 in fees and taxes
- $475 total interest from your spending at 17.24-percent
The actual cash price of flying from Denver to Long Beach is only around $496. Using the rewards card for the specific purpose of earning miles, if you cannot pay off your total debt monthly, can increase your out of pocket expenses by roughly 450%. A total amount paid on interest being equivalent to four potential trips to California over that time.
Although it’s common advice to pay off any credit card debt completely at the end of each month, it’s easier said than done – as the average American household owes over $15,000 – an amount 51% cannot pay back. Cards offering travel rewards are especially tempting but there are plenty of ways to earn frequent flyer miles without getting more credit cards, helping you avoid the hidden underbelly of traveler debt.
Thank you Ken for reminding us to save now and spend later – rather than spend now and pay forever. You can follow Ken on Twitter @KenneyMyers.
Isn’t it a pretty general consensus that you shouldn’t be playing the credit card side of the mileage game if you can’t pay down the balance every month, and that you shouldn’t be changing your spending patterns just for the sake of the mileage earned? I feel like this addresses bad credit management more than specifically mileage-earning products. That gif is great, though!
Yes, but it’s an easy trap many fall into – and if they didn’t, credit cards wouldn’t be the massive industry they are. Sometimes a good example with figures can help emphasize why you should follow even seemingly obvious advice, what I hope this post does.
Glad you like the gif btw, one of my favorite finds 🙂
Hello Stephen,
You are right. It is more about credit management then miles earned, but many of us get caught up in the hype and forget how credit cards make their money. Thanks for your comment!
Thanks for the great reminders that these credit cards (not just airline ones, but hotel, gas, and other rewards cards) can definitely end up costing more than we think if we’re not careful. But if you’re disciplined in using them only to purchase what you would have bought anyway, and mindfully pay them off each month, you can really benefit from some amazing cost-saving rewards. (It’s the only way we could ever afford to fly business or first class!)