How Much Are Those Free Airline Miles Costing You?

Published on June 29th, 2016

free sign

Everyone loves getting stuff for free.  But, when you take a closer look, are those free airline miles really free?  Unless you’re one of the lucky minority that pays off their credit card in full each month, those airline miles aren’t actually free.  The same can be said for cash back programs.  The reason that credit card companies are able to have rewards programs that include travel, cash back, or merchandise is that they are making enough money via finance charges and the various fees attached to their credit card to cover the costs of those programs.

Generally speaking, the rewards programs that give the “strongest rewards” are going to be on credit cards that have the worst terms.  By worst terms, I mean that the APR on the card is going to be very high as well as the fees associated with that card.  I think it’s also safe to say that the terms will be very restrictive regarding when their default rate kicks in.  To further clarify, if you’re late with one payment, the credit card company with the very rich reward program won’t hesitate to raise your rate to the default rate.  I’ve seen default rates as high as 29.9% APR.

If you’re fortunate enough to be able to pay off your credit card balance each month, then by all means, look for a credit card that has the best rewards possible.  If you are paying finance charges on your credit cards each month, then you really want to look at the terms of your card.  What’s your rate?  Is there a late fee?  When does it kick in?  Is there a default rate?  What is it and when does it kick in? 

Take a look at your statements.  Look at your finance charges paid.  How do the finance charges compare to your cash back or to the value of the airline tickets that you are trying to accumulate?  Were you late in making a payment once and now you’re stuck at 29%?  Sure those airline miles or cash back look like they’re a great deal, but they aren’t so much when you’re paying 29% on a revolving credit card balance.  Once you get stuck with carrying a credit card balance over each month, especially with a rate in the 20’s, it can be very difficult to get yourself out of that situation.

The point of this column is not to scare you off of credit cards that have rewards programs, not at all.  The point is to just be aware of the whole picture when you’re evaluating your credit card options.  If you’re in a position that you’re carrying a balance each month and paying finance charges, then you really want to take a look at what your finance charges and fees are costing you in relation to what benefits you’re getting from having that card.  You may be better off with a card that has a “lesser” rewards program or no rewards program if the fees and interest rate that you’re paying on that card are significantly less than your “high reward” card.  On the other hand, if you pay the card off monthly and are incurring no finance charges, then by all means look for a card with a rich, robust reward program.  Just make sure you’re never late with a payment, those companies will try to recoup their costs if they can.

As always, I love to get feedback or answer any questions that anyone may have.  Please feel free to email me at david.lukas@leydencu.org.

 


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