Saturday, April 5, 2014

What Is a Travel Rewards Credit Card, and Should I Get One?

Waipi'o Valley, Big Island, Hawai'i
If you read this travel blog, then chances are you've either seen advertisements and/or other travel-related blogs talking about "travel rewards" or "affinity" credit cards, all with some kind of enticing offer like "50,000 Bonus Miles!".  If you read this blog, you probably also have points in at least one frequent flier/frequent hotel guest rewards program, and more importantly, yearn to use those points some day on a trip to a place like the one in the cover photo.  But do they really work, and should you go out and apply for one?  After the jump, I'll offer my take on these credit cards, and where I think it makes sense to get one.

Disclaimer Notice:  I do not receive a bonus or other compensation from any of the cards mentioned in this post. 

What's the Difference Between an "Affinity" Card and a "Travel Rewards" Card?

These terms are sometimes used interchangeably, but there is an important distinction that you should keep in mind.  An "affinity" credit card is usually tied to a specific airline's or hotel's frequent flier/guest program.  Citi's AAdvantage Master Card and AMEX's Hilton HHonors Card are two such examples, tied to AA's AAdvantage program and Hilton's HHonors program, respectively.  You earn a set number of points per dollar spent, which accrue in that specific frequent guest program, and are typically not transferable to competitor programs.  Most affinity cards charge an annual fee, typically $75-99 per year, though sometimes as high as $450 per year; a few are available with no annual fee.

A "travel rewards" card, like an affinity card, generates a set number of points per dollar spent.  Unlike an affinity card, though, travel rewards cards usually carry no restrictions as to which travel supplier you use.  Points can either be applied as a statement credit, typically at 1 cent per point, towards travel purchases, or can be transferred to selected frequent flier/frequent guest programs - often at a 1:1 ratio, though sometimes at a reduced ratio.  Cards in this category include American Express (with Membership Rewards activated), Capital One Venture, Chase Freedom, and Diners Club (with Club Rewards activated).  Many travel rewards cards, including Capital One Venture and Chase Freedom, carry no annual fee; Diners Club and AMEX do usually charge fees, as high as $495 per year.

Kyle, aka "The Trip Sherpa", at has a new post up comparing 8 specific cards in both categories.

(In your best Breakfast Club impersonation) Answer the Question!!  Should I Get One???

Alright, alright, quit shovin'!  The answer, as is so often the case in real life, is "it depends".

The first thing you should do is assign a value to the points you will be earning.  For a basic travel rewards card like Chase Freedom, this is pretty easy - one point equals one cent in statement credit.  But if you're thinking about an affinity card tied to a specific frequent traveler program, you'll have to guesstimate a value of those miles/points.  A very rough rule of thumb for airline miles is that one mile is worth 2 cents (Southwest Rapid Rewards, an entirely revenue based redemption system, in fact pegs redemptions at a fixed rate of slightly more than 2 cents per point).  Hotel points are probably worth a little less than that. 

However, there is something else to factor in - many cards, both affinity and travel rewards, come with various perks built in.  These can range from discounts on mileage/points redemptions, to delayed baggage insurance, to rental car insurance coverage, to free checked bags, to airport lounge memberships (free or discounted).  Some cards also feature no foreign transaction fees, an important benefit if you travel overseas frequently.  Diners Club, for example, provides primary rental car insurance coverage and collision damage waiver for no extra charge as long as you put the entire rental on your Diners card; the CDW alone usually runs $15-20 a day, and the total value of the package is probably higher than that, since you would also avoid having to run a claim through your insurance company if in an accident.

Now, it becomes a simple math exercise - how much will you be spending on the card, and how much will you be taking advantage of the card's perks?  If the card charges no annual fee, like Chase Freedom, then in my opinion, it's a no brainer - get the card if you can qualify.  You're basically getting free money for charging everyday expenses.  Otherwise, if the benefits you receive equal or exceed the annual fee, it might be worth applying for the card.  Using Diners Club as an example again, the card charges an annual fee of $95, so in order to get $95 worth of travel credits back, you'd need to charge $9,500 each year on the card.  But if you rent cars a few times a year, you'd make your money back a lot faster than that with the rental car coverage.  Likewise, Citi offers a "World Elite" AAdvantage affinity card with a $450 annual fee, but it comes with unlimited Admirals Club access and one free checked bag.  Given that an Admirals Club day pass costs $50, and one checked bag costs $50 each way, if you fly several times a year, check a bag each way, and would use the lounge, you might find the benefits worth the fee.

Keep in mind also that some affinity cards offer point multipliers for staying within the brand.  AAdvantage cards offer 2 points per dollar spent on American Airlines tickets, for example, and the basic HHonors cards offer up to 12 points per dollar spent at Hilton properties.  If you plan on using the card for purchases within the brand, make sure to take that into account when computing your benefits.

What Else Should I Keep in Mind?

First and foremost, if you get an affinity card tied to a particular program, don't go overboard in trying to stay within that program.  For example, if you have the Citi AAdvantage card, I really don't recommend spending $1,500 to fly from Dallas to London on American if Delta will get you there for $1,000.  Yes, you forego approximately 11,000 miles in this example (9,500 for the flight, and 1,500 for the foregone double bonus) - but at 2 cents a mile, you're spending an extra $500 to earn $220.  Not a good deal if you ask me.  

That being said, if you live in a "fortress hub" city like DFW and/or your employer requires the use of a specific carrier, and you're in the market for a travel-related credit card, I'd suggest at least looking at an affinity card for the carrier that dominates your city's airport.  You're pretty much tied to that airline anyway, so you might as well get the benefit of multiplying your miles and getting stuff like free bags and lounge access (though if you fly that much, you're probably getting free bags courtesy of elite status anyway).  Just make sure you'll earn enough benefits to justify the annual fee, if you're paying one.

If your travel habits involve certain activities frequently - such as foreign travel or renting cars - then look carefully for perks specific to that particular activity, such as not charging foreign transaction fees or providing no-cost rental insurance.  These expenses can add up quickly, so choosing a card that offers these benefits is important.

And finally, a word about credit card "churning", or the technique of signing up for a rewards card, keeping it long enough to earn a sign-up bonus, and then canceling before the annual fee kicks in.  Rinse and repeat with another rewards card.  Some take a dim view of churning, considering it to be unethical behavior. While I don't consider the practice unethical, you should keep one important thing in mind - apply for a credit card generates an "inquiry" on your credit report, which does temporarily lower your credit score.  I wouldn't get too carried away with applying for cards or frequently churning cards for this reason.  And I would DEFINITELY NOT go hog-wild with applying for cards if you plan on buying a house or car within the next year; you'll want to keep your credit score as high as possible.

So there you have it.  Do your homework first, and enjoy collecting all those bonus points.

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