For credit card miles, just say ‘charge it’

After travel itself, the next most common way to earn frequent flyer miles is by charging purchases to a mileage-generating credit card. In fact, the widespread use of miles-for-charging cards has created a new segment of mileage-earners: Alongside the traditional frequent flyers, we now have frequent buyers.

Mileage cards: from novelty to mainstream

When the first miles-for-charges program was launched in 1985 by Diners Club, it was a novel marketing gimmick, assumed to have niche appeal solely to that most rarefied of consumer segments, the ultra-frequent business traveler. That was Diners’ core constituency, so it made sense.

Reaction to the first airline-specific card, launched by Continental the following year, was more skeptical. And in 1987, when American introduced the Citibank-issued AAdvantage credit card, not even the most fervent loyalty-program booster would have predicted that it was destined to become one of the world’s most widely held cards. (For “competitive reasons,” airlines and banks are less than forthcoming when it comes to divulging cardholder statistics. American claims 45 million AAdvantage members, and unofficial estimates are that more than three million carry a Citibank AAdvantage credit card.)

Today, every major airline and hotel program has at least one co-branded consumer card, and most offer small business and check cards as well.

The lure of travel

It should be mentioned at the outset that there are many alternatives to the mileage rewards schemes. For consumers whose primary focus is economy, there are credit cards that offer cash rebates (e.g. the Discover card). Other cards reward users with rebates on specific products or services (GM cars and trucks, ExxonMobil gasoline, Gateway computers, etc.). And still others kick back a small percentage of every charge as a donation to a designated association, school, or charity.

And then there are no-frills cards that simply offer users a low annual fee, or no fee at all, and a low annual percentage rate (APR).

Notwithstanding the multitude of rewards and rebate options available to them, many consumers choose to earn miles or points for their charges. What they’re really focused on, of course, is not the miles themselves but the travel those miles can be redeemed for.

As marketers say, travel is aspirational. That is, its perceived value far transcends its actual cost. Which explains why miles or trips are so often featured as rewards in marketing programs. And it underscores the importance of carefully weighing the benefits and costs associated with contending card products.

Travel rewards cards: the options

For those who have decided that it makes financial and emotional sense to seek travel rewards for their charge-card activities, a good first step in choosing a card is to divide the universe of cards into comprehensible parts. Here’s a three-way scheme that should be helpful in getting the lay of the mileage card land:

Airline co-branded cards

The first category of mileage card to consider is the airline co-branded card (co-branded in the sense that the Citibank AAdvantage card, for example, carries the brand of both Citibank and American AAdvantage).

Every major airline program (and hotel program, for that matter) has its own co-branded card. The typical card rewards users with one mile for every dollar charged, charges annual fees in the $50 to $100 range, and has a variable APR equal to the Prime Rate plus between six and 10 percentage points.

Most of the differences among the cards are at the margins, and amount to new-customer incentives: teaser rates, sign-up bonuses, free companion tickets, etc. Since these are short-term benefits in a long-term endeavor?earning enough miles for an award?they are best ignored except in cases where a tie-breaker is needed to choose between otherwise-comparable options.

Summary:

Positive: Earnings go directly to cardholder’s preferred airline account and are combinable with miles earned with other program partners. Since most airline cards are Visa/Mastercard, they are accepted by most merchants.

Negative: Tend to have higher annual fees, APRs. Earnings apply only to a single program.

Links: For airline co-branded cards, simply look for the links prominently placed on the websites of all airline and hotel programs.

Multi-program cards

Unlike airline co-branded cards, multi-program cards are not affiliated exclusively with any single airline or program. Rather, cardholders earn generic points that can be exchanged as needed for miles in the programs of participating airlines and hotels. This is a narrow category with only two players, American Express and Diners Club.

Membership Rewards is an add-on program, which users of most American Express cards can enroll in for a $40 annual surcharge. The program rewards cardholders with one Membership Rewards point for every dollar charged to an enrolled card. And the points can be converted?in most cases at a one:one rate?into miles in the programs of Aeromexico, All Nippon, Continental, Delta, EL AL, Hawaiian Airlines, Korean Air, LatinPass, Mexicana, Southwest, US Airways, and Virgin Atlantic, as well as the hotel programs of Best Western, Hilton, Marriott, Six Continents, and Starwood.

Diners Club cardholders are automatically entitled to participate in the Diners Club Rewards program; there’s no extra charge over and above the $95 annual fee. Also on the cost side, Diners is the only major program that charges a redemption fee: 95 cents (or 190 Club Rewards points) for every 1,000 miles transferred to an airline.

Rewards points are earned at the rate of two for every dollar charged. But they convert into most airline programs at a rate of two points per mile. So in the end, a dollar charged translates into a mile earned, as with other programs.

Where Diners really distinguishes itself is in its partnerships. Points can be converted into miles in 24 airline programs and eight hotel programs.

While both have made progress in this area, American Express lags behind Visa/Mastercard in merchant acceptance, and Diners is accepted by fewer merchants still.

Summary:

Positive: Earnings are applicable to multiple airline/hotel programs. Miles don’t expire as long as account remains in good standing. No limit to points earned.

Negative: Amex/Diners cards are accepted by fewer merchants

Links: American Express, Diners Club

Independent travel rewards cards

The independent cards developed, historically, from the banks’ recognition that co-branded airline cards were capable of both attracting more cardholders and generating more charges per cardholder. Kaching! So, the banks reasoned, why not add a mileage-type rewards program to cards not affiliated with any particular airline? Many did, creating an entirely new species of mileage card.

As with the airline cards, independent cards reward users with one mile for every dollar charged. But when it comes time to redeem, the independent programs simply purchase a ticket on the member’s behalf. Because these programs are not bound to any one airline, the award tickets can be on any airline, price permitting.

Playing on the widely reported (and probably overestimated) consumer dissatisfaction with the unavailability of airline program award seats, the independent programs promise a no-hassle award experience. As one independent card boasts: “Any Airline! Anytime! Fly on major airlines with no blackout dates!” The fine print, however, reveals a number of significant restrictions on award travel. Tickets must be requested at least 21 days in advance and include a Saturday-night stay. The dollar value of award tickets is “capped,” typically at $400-$500 for a roundtrip domestic coach award. And rather than the industry-standard 25,000 miles, the independent programs require 35,000 miles for a free coach ticket within the U.S.

The other selling point of the independent cards is their comparatively low cost. The heavily promoted Capital One MilesOne Platinum card, for instance, has an annual fee of $19, and a low 9.9% fixed-rate APR. The MBNA Elite Rewards Platinum Plus Visa card has no annual fee and a 12.99% APR. Other independent cards are similarly priced.

Summary:

Positive: Lower fees, APRs. Miles can be redeemed for flights on most airlines. Awards are not subject to blackout dates or capacity controls.

Negative: Earnings cannot be combined with miles in airline/hotel programs. Award travel is restricted (advance purchase, maximum ticket price, etc.). Miles expire.

Links: Capital One MilesOne Platinum Mastercard, MBNA Elite Rewards Platinum Plus Visa

How to choose: cards for flyers, cards for buyers

As already suggested, credit card users can be seen as lining up along a continuum, with those earning their miles for airline flights and other travel-related activities at one end, and those whose miles are earned via shopping at the other end. Most of us fall somewhere in between these two extremes; and where we fall helps determine which type of card is the best fit with our particular needs and lifestyle.

Frequent travelers

Because frequent flyers earn a significant portion of their miles from traveling, they are generally best served by avoiding independent cards, whose miles cannot be combined with miles earned in airline or hotel programs.

For those who are able to concentrate their earning in a single program (the most effective strategy, as discussed elsewhere in the “Joy of Miles” series), the choice is straightforward: Use the card affiliated with your preferred airline program. All credit card miles will then go into the same account with airline, hotel and other program miles, and award levels will reached sooner rather than later.

If you are forced to distribute your mile earning more or less equally among several programs, consider American Express Membership Rewards or Diners Club Rewards.

Frequent Buyers

Independent cards should be on the shopping list of anyone who does not expect to earn a significant number of miles by traveling.

Because the rewards component of the cards is similar, evaluate the contenders according to cost. If you pay off the monthly balance in full, ignore the APR and look for a card with a low annual fee, or none at all. If you maintain a monthly balance, factor in the APR.

There is one airline co-branded card, which should be on frequent buyers’ short list, however. It’s the Delta SkyMiles card issued by American Express. The card’s distinguishing characteristic: “Always Double Miles” for charges at qualifying stand-alone supermarkets, drugstores, gas stations, home improvement and hardware stores, and the U.S. Postal Service. With a $55 annual fee and a Prime+9.9% APR, it’s more expensive than an independent card to keep in your wallet. But if you figure that a frequent flyer mile is worth about 2¢, you would only have to charge $4,250 to recoup the value of the annual fee in bonus miles.