The following is a post by guest blogger Michael, founder of CreditCardForum.com, which is a website for credit card reviews. He also writes on a number of other personal finance topics like budgeting and saving money.
During the recession they all but disappeared, but now those “free” flight credit card promotions are back… but are they truly worth it? Surprisingly, instead of saving you money, travel credit cards may actually be harming your budget! Here’s why…
The annual fee isn’t always waived
Not all of the offers waive the annual fee for the first year. Being that most airline and hotel credit cards charge annual fees ranging from $60 to $150 and up, that’s a steep price to pay just to get a mileage bonus! So to figure out the real value of a signup off, make sure you take the fee into account if it’s not being waived.
The bonus points might be given to you over time
I’m a huge fan of the Escape card by Discover because it essentially gives 2% on your spending, but I’m not so much a fan of how they structure their signup bonus. They give 25,000 miles for getting a new account but you don’t get those all at once. Instead, for 25 months you get 1,000 miles for each month you make a purchase. I still love the card for the 2% rewards but I certainly wouldn’t recommend applying for it if you are expecting a quick and easy signup bonus from it, because that’s not going to happen!
The bonus miles aren’t enough for your ticket
As a general rule of thumb, if an airline travel credit card says you are getting enough miles for a free flight, you should assume it’s for an off-peak times and limited routes.
I found this out the hard way upon signing up for a credit card from Spirit Airlines. The reason I applied was to get the free flight, but the points weren’t near enough for my flight between Detroit and Los Angeles. No matter how far I looked in advance, I couldn’t find a way to book that flight using the bonus miles alone. I have since read a number of credit card reviews from other cardholders that share this same complaint.
Years ago I remember the backlash there was when American Airlines started the tiered pricing for award flights (MileSAAver Off-Peak, MileSAAver Peak, and AAnytime). But nowadays every airline card that I know of does the same thing. As fuel prices have risen the last few years, it keeps getting harder and harder to snag a flight for the base number of point and I don’t see that trend changing. Good for airline profits, bad for those of us trying to spend our miles!
Because you don’t have enough miles, you spend more
This is probably the biggest problem when it comes to travel rewards credit cards. The typical signup bonus is 25,000 miles but most flights end up costing at least double that – 50,000 miles. We apply to get our free flight only to discover we don’t have anywhere near enough miles. So what do we do? We start spending more so we can get that ticket. It might not be something as drastic as buying a new TV to rake up miles, but it could be spending a few more bucks at the grocery store every week. I’ve heard from many people who have confessed to doing this.
But the predicament gets even worse if you signed up for a first-year free offer, and did that with the intent of canceling before the second year. Now you might be stuck between a rock and a hard place – at the end of the first year you have a nice chunk of points but it’s not enough for your ticket. It’s too many points to forfeit so you bite the bullet and decide to pay the annual fee for the second year… and here you thought opening the card was going to save you money!
Don’t get me wrong, for the right person airline credit cards make complete sense. However for a lot of people they simply won’t make sense, as demonstrated above. The same rules apply to hotel credit cards too… they really don’t make sense unless you travel an awful lot and stay at the same high-end hotel chain each and every time. At the end of the day, I would say that the average person if going to benefit more from a regular cash back card more than they will from a travel credit card
Editor’s Note: I think it comes down to the notion that I often bring up here – it’s hard to get something for nothing. Yet, many if not most of us have that urge. Those rare times that it happens, it’s great. But it’s not as easy as just getting a truly free flight just for opening an airline credit card! We should all be wise to read the program details and think it through, since these cards can work for some people but not all, as the author indicates.