It’s easy to love free things, and of all the freebies that tempt us, none make a wandering spirit more weak in the knees than the promise of free airfare.
It’s about a million degrees below zero in Chicago for the third straight week, and I’d love nothing more that to hop on a jet, head to L.A., and leave the $500 airfare behind at the gate.
So over the years I’ve accumulated several frequent-flyer miles rewards credit cards, and yes, I’ve racked up quite a few free flights. But with 2014, I promised to clean house financially like never before. First, my wife and I paid off a mass of credit cards in one fell swoop—we couldn’t kill them all, but we decided to start with the cards that had the highest interest rates.
Our targets included my Chase United Mileage Plus credit card with a not-so-hot APR of 13.24 percent.
To cop a bit of airline lingo, 2013 brought some financial turbulence to the Carlozo household. So we carried balances on our credit cards longer than we’d planned. (Yes, we know better, but in the ups and downs of life, sometimes credit cards are the only way to weather difficult times).
Before I hit “confirm” on the payment that wiped them out, I took a long, hard look at how much I paid in interest on just one card last year:
Now, adding $95 in annual fees for the card, that comes to just a few dollars shy of $2,800. And in 2013, I earned enough in frequent flyer miles to take two “free” flights—that is, free if you overlook the $75 “close in” booking fees I paid both times.
Now, let’s do the math, and try hard not to laugh.
I paid $1,400 apiece for the privilege of taking two “free” flights via my Mileage Plus card.
I suspect I’m not the only one in this post-Recession environment who’s fallen into this trap of my own devising. And so I’ll declare it here, with my own numbers to back it up: If you carry balances on your credit card for more than the occasional month or two, frequent flyer credit cards are simply a ripoff—and the enticement of free air travel masks mighty unfavorable APR terms and annual fees.
This also brings up a larger and definitely related issue: Frequent flyer miles ain’t what they used to be, kids.
Knowing the true value of a credit card mile is the first step in profiting from airline credit cards, but one thing’s for sure — the game is getting harder to game.
In November, United angered whatever loyal customers they have left by jacking up its frequent flyer award levels. In some case, the thresholds for international free travel shot up more than 60 percent. But even for more modest destinations such as Hawaii, it will take you about 13 percent more miles to get the same award. The changes go into effect Feb. 1, and you can view the old and new award levels by clicking on the respective links in this sentence.
Now it’s still possible to game these airline credit cards, even with their sky-high fees and bad interest rates. And it’s not as if they don’t come without some perks: signing up, for example, usually scores you enough miles to book a free flight. Here’s a list of current sign-on credit card promotions, and you’ll notice that the travel rewards cards are among the most generous with their freebies.
But you’d better know what you’re doing, says Brian Kelly, founder and CEO of ThePointsGuy.com.
“The beauty of airline credit cards is banking valuable miles and scoring money-saving perks like free checked bags and priority boarding,” Kelly says. “If you can maximize those benefits, it can more than make up for the annual fee. However, it’s critical that you pay your cards off in full each month because in general their APRs tend to be higher than non-airline and non-rewards cards.”
I enjoy Kelly’s columns; he dispenses savvy advice on how to collect enough hotel points, airline miles and the like to make you a most happy traveler. And he’s right. But one phrase in his response puzzled me: “in general.”
I asked Kelly if he could name one airline credit card with a super-duper APR, and off the top of his head he couldn’t. In fact, a few have fees so high, you might want want to consider a second mortgage, or hiding in a very large suitcase in lieu of booking a seat.
“For some, the $450 annual fees on the Citi Executive AAdvantage World MasterCard and Delta Reserve cards are way too high,” Kelly says. “But those looking for the club access and the ability to earn elite-qualifying miles, paying that premium can be worth it.”
That said, the high-APR question is likely not to go away where airline credit cards are concerned. “Even if you get 10 cents back for each mile you redeem—and you’d have to find some truly high-priced international premium tickets to get a return like that—if you carry a balance and pay 19 percent APR, you’re literally losing half your value,” he says.
Meanwhile, consider this trick that I tried recently with another creditor, a Barclay’s MasterCard that earns miles on US Airways. For this to work (and it’s a toss up whether it will), you should be in a position to pay off the credit card balance immediately. That’s your leverage.
My US Airways card carries an astonishing APR of 18.24 percent. So I called customer service, asked for a manager, and told her that the APR was simply too high, airline card or no. If she couldn’t lower my APR on the spot, I’d pay off the balance, close the account and Barclay’s would lose me as a customer permanently.
It took them about 90 seconds to shift my balance at a new rate of about 14 percent. That’s going to save me a lot of money in interest payments over 2014, should I carry a balance. Then again, I’ll save the most money if I can simply pay off the balance and stop paying interest charges.
Will I keep my airline credit cards? Perhaps, if I can figure out a system for paying off the balances at the end of every month before interest accrues.
But I also know myself. And the temptation in a lean month to let one balance slide, then another, then another, is the financial equivalent of boarding a flight for the heart of the Bermuda Triangle at the height of hurricane season.