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.
Initial 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 today claims 66 million AAdvantage members, and unofficial estimates are that close to 5 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, Radio Shack batteries, 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. In other words, its perceived value far transcends its actual cost. That explains why miles or trips are so often featured as rewards in marketing promotions and sweepstakes. And it underscores the importance of carefully weighing the benefits and costs associated with contending card products.
In what follows, we assume that you have analyzed your options and made an informed decision to pursue miles, rather than a cash rebate that might be worth more than a free trip.
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 and hotel program has one or more of its own co-branded cards. The typical card rewards users with one mile for every dollar charged, charges annual fees in the $50-$100 range, sometimes waived for the first year, and has a variable APR equal to the Prime Rate plus between six and 10 percentage points.
Although airlines are increasingly featuring high-priced cards that come bundled with perks such as elite-qualifying miles and waived carry-on fees, the differences among a majority of the cards are still at the margins, and amount to new-customer incentives: 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 paid little heed except in cases where a tie-breaker is needed to choose between otherwise-comparable options.
- Positive: Earnings go directly to cardholder’s airline account and are combinable with miles earned with numerous 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.
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.
The highest profile example is Membership Rewards, the rewards program linked to many American Express cards. 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 1:1 rate—into miles in the programs of 16 airlines, including Delta, AirTran, British Airways, Frontier, JetBlue, and Hawaiian, and into points in five hotel programs.
There’s a price, literally, for the convenience of being able to exchange Membership Rewards points into other currencies: American Express charges 60 cents for every 1,000 points exchanged, up to a maximum of $99 per transaction.
Another option for those in need of a card with multi-currency earning capabilities is actually a hotel-linked card, the Starwood Preferred Guest card, also issued by American Express. Charges to the card earn Starpoints, which can be exchanged for miles in the programs of more than 30 airline programs.
- 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: American Express cards accepted by fewer merchants; fees to exchange Membership Rewards points.
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 typically 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 consumer dissatisfaction with the limited availability of airline program award seats, the independent programs promise a no-hassle award experience. In fact, one of the early and most heavily marketed of the cards, from Capital One, was called the No Hassle Miles Rewards card, and boasted: “You choose—fly any airline, anytime, with no blackout dates or seat restrictions.”
While the details vary among the different cards, there are a number of significant restrictions on award travel lurking in the fine print. Tickets often 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 round-trip domestic coach award. So while cardholders may have escaped the vexing capacity controls of the airline-operated rewards programs, the independent programs are not entirely hassle-free, either.
The other selling point of the independent cards is their comparatively low cost. The Chase Freedom and Citi ThankYou Preferred cards, for instance, have no annual fees. And where independent cards do come with annual fees, they tend to be lower than those of the airline cards.
- 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.
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.
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 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 be reached sooner rather than later.
If you are forced to distribute your mileage-earning more or less equally among several programs, consider American Express Membership Rewards or the Starwood card.
Independent cards should be on the shopping list of anyone who does not expect to earn a significant number of miles by traveling. Such cards can indeed make award redemption somewhat less onerous, as advertised, but consumers should still be prepared to grapple with a mountain of terms and conditions before that free ticket to Tahiti materializes.
Nothing in the world of travel rewards is completely free, of hassle or expense.
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