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Airline Credit Cards Aren't the Best Choice for Everyone

Airline Credit Cards Aren't the Best Choice for Everyone
(Dollar Photo Club)

Saturday, 09 December 2017 12:29 PM Current | Bio | Archive

The average U.S. consumer is better off sticking to a no-annual-fee cash back credit card rather than an airline one.

ValuePenguin analysis of consumer data shows these cards typically have high annual fees (the median of $75) that eat into their rewards. The data suggests that the average person can get a higher net return by using a no-annual-fee cash back card instead.

Earlier this year, the Bureau of Labor Statistics released data on how consumers spend their money. Of the categories listed, six comprised purchases that could be charged to a credit card:

  • Food at home: $4,049 per year
  • Food away from home: $3,154 per year
  • Apparel and services: $1,803 per year
  • Gasoline and motor oil: $1,909 per year
  • Entertainment: $2,913 per year
  • All other expenditures: $3,933 per year

Top airline cards provide an average return of about 1.8%, which comes out to roughly $320 (in annual rewards, if all of the average expenditures above were charged). By comparison, the best cash back credit card can provide consumers with roughly 1.5% back, for a grand total of $266 for that same average spend—which represents $53 less than what the airline card provides. However, airline cards have a median annual fee of $75, which shifts the net reward in favor of the cash back card.

Of course, averages tell only part of the story. On an individual level, people may find that what's best for them doesn't always align with what's best for the average person. If you're curious about whether you're one of the people who's better off applying for an airline card, here is a quick guide to how you can evaluate these offers.

Consider the value for you of the benefits these cards provide

Before you do anything else, it's important to figure out the value of what the benefits the card provides. This starts with understanding the value of their miles--as in how much they’re each worth when redeemed to buy a flight. If you don't feel like figuring it out on your own, simply search the web for "X miles value" — where "X" is the airline of your choice. Then estimate how many miles you can realistically earn with the card each year and multiply that figure by the mile value. For example, if you can earn 50,000 miles each year, and each mile is worth $0.01, the card then provides you with $500 in rewards (50,000 x $0.01).

Miles aren't the only rewards airline cards provide. Make sure you factor in things like credits you can apply towards buying in-flight meals, free checked bags and companion passes. You shouldn't expect these benefits on every card, but at least a handful offer them. You may also find that it's harder to assign value to some benefits than to others. For example, some cards provide access to airport lounges. While there are set fees for access to these luxurious spaces, the value to you of this experience is what really matters. Do your best to put a price on how much such experience-enhancing perks are actually worth to you.

Think of the opportunity cost

Most people will only ever carry a handful of credit cards, so every new card you acquire should bring you some advantage. That means considering whether a new airline credit card will provide a bigger net benefit than, say, a cash back card you already own. As we demonstrated in the example above, earning just 1.5% cash back has the potential to be more lucrative than earning 1.8%, if you're not paying an annual fee.

So how does the math work out? Once you calculate the annual value a particular airline card has to you, subtract any annual fees from that total. Compare the net result with the cash back you could earn from a no annual fee credit card. Using 1.5% is a good rule of thumb, as most decent cards today can give you that kind of return.

How much time are you prepared to invest in redeeming airline miles?

Finally, you should also consider how much time you want to spend redeeming miles earned through credit cards. Your miles will have some value. When you don't redeem them carefully, you can be trading them away for far less than they're actually worth. Think of miles as currency. Most people are aware of what a dollar is worth to them. If you were offered a pack of gum for $20, chances are you would turn the offer away immediately, recognizing it as a bad deal. Miles are less familiar to most of us, so each transaction will require you to evaluate whether it's a good deal or not.

It's best to stay away from airline cards, unless you're willing to put in the effort required to optimize your use of miles. Not paying attention to how you're redeeming miles can greatly reduce the value you obtained in step one of this guide, and throw off your entire evaluation of a card.

Maxime Rieman is Product Manager at ValuePenguin. Educating and assisting shoppers about financial products has been Rieman's focus, which led her to joining ValuePenguin, a consumer research and advice company based in New York. Previously, she was product marketing director at CoverWallet and launched the personal insurance team at NerdWallet.

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Miles aren't the only rewards airline cards provide. Make sure you factor in things like credits you can apply towards buying in-flight meals, free checked bags and companion passes.
airline, credit, cards, popularity
Saturday, 09 December 2017 12:29 PM
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