Should I get a Travel Rewards Credit Card?
Travel Hacking (traveling for free, or nearly free, thanks to travel rewards credit cards) is a hot topic. Before your friend, or favorite influencer, convinces you that a free first-class flight to London could easily be yours, it’s helpful to pause and make sure you understand how these cards work and, more importantly, to reflect on your own track record using credit cards.
What is a Travel Rewards Credit Card?
Many credit card companies offer incentives for you to open a new credit card with them. Typically, these cards will offer a Sign Up Bonus (SUB) along the lines of 50k reward points (valued at around $500) after you spend a certain amount on the new card within the first 3 months. Additionally, for every dollar you spend on the card you get another point or two. Then, you can use these accumulated points to pay for flights, hotels, rental cars, etc.
What is a Travel Hacker?
A Travel Hacker is someone who strategically opens multiple travel rewards cards so they can have all (or nearly all) of their travel expenses covered by credit card points. There are online communities, blogs, and e-courses that help people navigate optimal card application and point redemption strategies. In these communities, you will often see people posting pictures of their amazing “free” first-class international flights.
By playing the points game effectively, you can get incredible value for redeeming your credit card points. However, it’s worth noting that these “free” trips are usually not exactly free. Typically you will still pay the taxes and other fees, like fuel charges. And with many of the premier travel reward cards, there are annual cardholder fees of anywhere from $50-$500.
If your only travel expenses are these taxes/fees and annual cardholder fees, that is likely a very minimal expense compared to paying for your flights and hotels in cash, but it’s worth highlighting that Travel Hacking isn’t quite as “free” as your friends or influencers are claiming.
Also, to get these amazing deals, people are investing a lot of time learning how to game the system. If you enjoy doing that in your free time, then you may see this as a lucrative hobby. But if learning how to navigate a new system, reading point redemption blogs, and having to remember which card to use at which store sounds like a real pain, it’s worth questioning how much time you are willing to invest in getting “free” travel.
Should I get a travel rewards credit card?
While some travel hackers play the system incredibly well, credit card companies continue to offer these incentives because they often prompt people to rack up more credit card debt. If you are considering whether or not it makes sense for YOU to open a travel rewards card, here are a few questions to ask yourself:
Do I ALWAYS pay my credit card statement balance in full?
Will reward points incentivize me to spend more?
Am I hoping to reduce my current travel costs? Or am I trying to afford additional travel?
Do I have the time/interest to learn how to game the system?
Do I ALWAYS pay my credit card statement in full each month?
This is the biggest question to ask. Are you able to pay off your credit card bill consistently every month (you are never hit with interest fees or late payments)? If you are already using another credit card effectively, swapping it for a card that gives you points for what you are already doing may be worth considering.
However, According to a 2022 LendingTree survey, about 65% of Americans carry a balance at least some of the time. If you are carrying a balance from month to month the interest fees you are paying are unlikely to offset the value of the travel points you would accumulate. Before applying for a travel rewards card, pay down any existing credit card debt and build an emergency fund.
Example of how much the free points might cost you if you carry a card balance
Let’s say you open a new card that has a 24% APR, offers a 50,000 Sign Up Bonus ($500 value) if you spend $5,000 in the first 3 months, and 1 point ($.01 value) for every dollar you spend. For the sake of a clear example, let’s assume you spend $5,000 in the first month, then stop using the card (no additional purchases).
If you pay off your card balance in full before the due date that first month, you will get your 50k SUB and an extra 5k in points for the $5k you spent. That means you’ve accumulated 55,000 points ($550 value), without any credit card interest fees.
Alternatively, if you spend that same $5,000 in month one, but then are only able to make a monthly payment of $100 (your monthly minimum), you will still get the same 55,000 reward points ($550 value), but you will be accumulating $100 in credit card interest fees each month indefinitely. Because you are only making the minimum payment of $100/month (minimum payments are often around 2% of your total balance) and your interest fees are $100/month ($5,000x24%APR/12 months), you will continue making that monthly payment without ever chipping away at the actual card balance. A year after opening your card you will have earned $550 worth of points, but will have paid $1,200 in interest fees, AND you will still have a card balance of $5,000.
Comparison of net benefit based on how quickly the balance is paid off
Again, this is a simplified example to highlight the point. Many variables will impact how this plays out for you (interest rate, card balance, how much you can afford to pay each month). However, the main takeaway is, that if you aren’t sure you will always be able to pay off your balance in full, opening a new card can easily cost you a lot more than the value of the “free” points you are earning.
Will reward points incentivize me to spend more?
We are all more susceptible to this than we think. Multiple studies have shown that we tend to spend more when we use a credit card than when we pay with cash. Cash has a tangible aspect to it, that makes it easier to feel the impact of spending money. So if using a credit card is going to make you more inclined to buy things, or to spend more per transaction, it may end up costing you a lot to get that free flight.
Most rewards cards offer a Sign Up Bonus, but to get the bonus points, you have to spend a certain amount within the first few months. If, for example, you were about to buy a new washer and dryer (you already have the money for it saved in your checking account) and decided to apply for a new credit card first, knowing that this one purchase will cover the majority of the minimum spend, that’s a scenario where opening a new card may make sense. You already have the money saved up for the purchase, so you will be able to pay off your card balance right away. You’ve already decided you were making the purchase, so the new card didn’t prompt you to spend more.
However, what often happens is someone opens a new card, and then the incentive of the Sign Up Bonus nudges them to make additional purchases. Maybe they’ve been thinking about buying a new washer and dryer, but it’s not until the pressure to hit the minimum spend that they decide to do it. The minimum spend helps people justify making purchases they wouldn’t have otherwise made.
If you know you struggle with impulsive spending, consider if adding another reason to justify more purchases is actually in your best interest.
Am I hoping to reduce my current travel costs? Or am I trying to stretch my travel budget further?
Clarifying what you are hoping to achieve with your travel reward points helps ensure you aren’t unknowingly justifying spending more than you planned.
Some people will use credit card points to offset their overall travel costs for the year. Let’s say that your total travel-related costs for the year would have been $3,000 without credit card points. With your credit card points, let’s assume you can cover the cost of 1 flight and two hotel nights, so now you only have $2,250 in travel expenses. In this scenario, utilizing points has saved you $750 (assuming acquiring those points didn’t prompt you to spend more on other purchases or credit card interest fees).
Alternatively, you may decide that you were already planning to spend $3,000 on travel (it’s in your budget, you know you can afford this expense) so you opt to use your credit card points to add in an extra trip. In this case, you keep your original travel plans and add an extra trip (flights and 2 nights at a hotel).
Neither of these options is better than the other, but understanding if your goal is to reduce your overall expenses OR to increase your travel experiences at no (or low) cost to you will reduce the likelihood of the card being an excuse to justify more expenses.
Note that if you plan to add additional travel to your calendar, there is a tendency to think of free flights as synonymous with a free trip. When you are envisioning your free trip, don’t forget all the other expenses beyond the flight. Even if you have enough points to cover Flight + Accommodations, there are the extra meals out, the taxis, entertainment, etc. And when we are on what feels like a “free trip”, there is a tendency to spend more freely, because we don’t feel guilty splurging on an expensive meal knowing we didn’t pay for the flight. While that’s not inherently a bad thing, make sure you factor those expenses in.
Do I have the time/interest to learn how to game the system?
There are more than enough examples of people getting thousands of dollars worth of travel for free to prove that playing the points game can be effective. However, the people who are most successful at this invest a lot of time learning how to play the system.
The people who post photos of their first-class international flights spend a lot of time reading blogs about point redemption strategies. They have a wallet full of credit cards, with notes of which cards get the most points at which types of stores. They are frequently updating their billing details with new card numbers when making online purchases. If you enjoy these tasks, the points game can be a great hobby. If just reading this paragraph gives you a headache, it might be worth pausing on that new card application.
Many people take a more moderate approach to travel rewards cards, and will only open one or two card rewards cards (either a card that has flexible reward options or a card for an airline they fly frequently) and stop there. This approach allows you to reap some rewards while avoiding most of the headaches of optimizing point strategies. Just don’t expect that this lower-effort approach will cover that all-inclusive trip to the Maldives that you’ve been eyeing.
This seems too good to be true
Any time that “this seems too good to be true” intuition pops up, it’s wise to explore deeper. If an offer seems too good, or like they are giving away too much for free, it can be helpful to figure out how the company is profiting from the offer. That doesn’t mean the offer is necessarily sketchy, but understanding how they profit makes it easier to determine if participating is actually in your best interest.
When a retailer offers a 20% discount, it’s not because they love you, it’s because they are hoping that discount nudges you to buy something you otherwise might not have, or maybe you will buy more items than you originally planned.
With credit cards, there are a few ways they make money. The first is through transaction fees. When you swipe your card, the credit card company charges the merchant a small transaction fee. So if you buy something for $100, Visa keeps about $2, and the store gets about $98. This is why some smaller stores only accept cash, they don’t want the credit card company eating into their profit.
If your credit card charges an annual cardholder fee, this is another way they profit from their customers.
Lastly, and most importantly, when people accumulate debt balances (when they aren’t paying their credit cards off in full) the card company issues interest fees. Interest fees, along with late payment fees and cash advance fees, are where credit card companies really make their money.
If you pay your credit card balance off in full every month, you are not a lucrative customer for credit cards. If, on the other hand, you are only making your minimum payments, you are an incredibly lucrative customer.
While there are many people who are paying their credit cards off in full, and reaping huge travel hacking benefits, the credit card companies continue to offer these travel points because many of the people who are opening these cards end up being the lucrative balance-carrying, interest-fee-paying customers.
So, before applying for a new card, it’s important to reflect on how confident you are that you are in fact one of the people who will game the system and not someone who will be gamed by the system.
Why are people talking about credit card rewards so much?
If it seems like everyone is talking about travel rewards cards, I think it’s also worth questioning why that is. Are your friends and favorite influences just so jazzed to share the good word about free travel perks and they don’t want to gatekeep them? Maybe. But if you are picking up on a level of enthusiasm that has a scent of MLM vibes, it’s helpful to understand what may be in it for them.
Credit card companies incentivize their customers to encourage their friends/family/newsletter subscribers to apply for the credit card. With many cards, if someone is approved for a new card using your referral link, you get the equivalent of around $100 in credit card points.
I’m not saying that travel reward credit cards are a scam, just that the people most vocally promoting them may have something other than your travel budget in mind when they are gushing about the perks. If your friend seems a little over-eager talking up their recent travel hacking trip, ask them if they have a referral code, and see just how quick they are to get that to you.
That being said, if you ARE going to open one of these cards, you might as well use a referral link. Sometimes, both you (the card applicant) and your friend get bonus points. Just be sure that applying for a card is actually in your best interest. Your friend may be the type that pays her credit card bill off in full every month, so for her, it is essentially free money. But if she isn’t aware that you’ve been struggling with your existing credit card debt, her well-intentioned recommendations may actually do more harm than good.
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