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Jan 11

Credit Card Strategies

 

Converting Cash to Points/Miles

 
A lot of information that is sensionalized today with regards to travel is traveling through lucrative credit card/points offers and usage, and while in some sense it’s true, there a few things that you should understand and be aware of.  Unfortunatelly, once you actually learn the details you’ll relize that traveling in first class every other weekend for free, simply on points/miles, year after year is impossible.  But, that doesn’t mean that you can’t utilize these methods for you and your family to have a few very comfortable trips per year.  Let’s walk through some of the nuances to understand how you can better your chances at sustainable travel for your family.

Cash vs. Charge?

Never use cash, period.  OK, there may be a few instances where a specific place will not accept a credit card, or a specific credit card that you may carry, but you should always charge everything.  Do not go into debt, this is not what I’m saying — if you can’t afford it you shouldn’t be buying it on a credit card with an idea that you’ll make it big with points.  But, if you have the cash to make any purchase you should always try to make it a credit card purchase.  The great benefit to you is that the vendor/credit card companies have already worked out their fees on their end, so cash or charge price is identical to you: what’s different is that through a cash purchase you’ve purchased it with no reward, where’s with a credit card purchase you can leaverage the purchase for anywhere 1-10% in award travel returns.  

What are points/miles worth?

That’s a very, very broad question.  Typically in the travel award business you’ll get a minimum of somewhere of 1%, or 1 cent for every dollar spent.  Your business — and the purpose of this blog —  is to beat and exceed that number.  Credit card companies, airlines, hotels go out of their way to try limit you to 1%, but that is the whole-sale price of a point that you should be settling for, a typical savvy traveler will aim for anywhere between 1.5-2.2% on domestic coach-type travel, and in many instances when you travel internationally and in First/Business class it’s not undeheard of getting 5-10+% back. 

Sometimes travel companies will solicit you with travel “opportunities” by allowing you to purchase their points/miles, but typically the purchase rates are in excess of 2.5 cents per mile.  Considering majority of people travel domestically, it’ll be hard for you to extract additional value in excess of your purchase price, so unless you really need to top-off your account for a speicifc redemtion immediately I would never suggest anyone to purchase points/miles directly from companies for speculative or saving purposes, you’ll rarely come out ahead, but in the future we’ll discuss certain opportunities as they arise.

Airline Credit Cards, Travel Credit cards or Flat-Fee Credit Cards?

On the internet, on TV and probably in print media you’ve come accross a plethora of credit card companies offering you what they claim is the best deal in town, sometimes it’s even the celebreties trying to convince you to sign up for some specific product.  That’s actually good for you as a traveler, because you have choices, and if you have knowledge and information you can leverage it to benefit you.

Typically, the Flat-Fee credit cards are the worst deal.  Even though they may offer you 1-1.5% on every single purchase, as mentioned in the previous section, with enough knowledge you can exceed that reward by a fairly large margin.  Thus, unless you’re starting to build your credit with a low score and those are the only products available to you I would suggest that you quickly ignore these products and concentrate on something that offers larger rewards but in narrower categories — thankfully for us it’s usually in the travel category.

Airline Credit Cards are the second tear of good value, but to me they’re still not the best.  They’re good because they offer you a direct route to travel but they’re typically extremely controlled by the airlines and they lock you into only dealing with that one speicific company.  I usually recommend these as supplumental products, or unless you’ve decided that your stragety or goal is only to redeem awards on airtravel with a major airline that’s avaialble in your city hub.  

Travel Credit cards are then, in my opinion, top of the top.  Many of these credict cards have dozens of redemtnion partners: everyone from domestic and international airlines, to hotel chains and in certain cases even train transportation.  What you’re getting with travel credit cards is the flexibility to chose where you eventually redeem your points/miles, which also allows you to be flexible and shop around.  If two airlines have two different award costs for the same travel itinerary with a travel card you have a choice, if you only hard a credit card from a speicific airline you may be on the bad end of the deal.  And you’ll quiclky learn that with award travel flexibility is key, and often times a difference between a great deal and an OK deal may be as little as 2 hour flight difference.  

Sign-Up Bonues

Often times people are blinded by “100,000 Point Sign-Up Bonus”, or pick any number that you’ve seen.  It’s always important to understand what the point is actually worth.  For flat-fee redemtions these typically hover around 1 cent, but one banks 100,000 bonus may actually be less than a 50,000 point bonus from another bank.  Some of these nuances were already discussed above but we’ll talk to about them in much bigger detail as we start reviewing specific deals in future posts.

Ever read the fine print with regards to these Sign-Up Bonuses?  Two of the main categories to keep your eyes on are: Annaul Fees and International Fees.  I am ignoring interest rates because I never advise of purchasing anything on pure credit ever, if you do not have cash for a purchase you should not leverage yourself in debt with a hope of making a killing on travel award, that is not a sound financial advise and you should concentrate on elinating debt, period.

Annaul fees often range anywhere from $49 to $450+ per year.  If we aim for average 2% redemption rate that means you typically have to spend in excess of $2450 to $22,500 on that credit card per year to even break even on the yearly fees.  Good for us, there are plenty of credit cards that come with fees waived for the first year.  These credit card offers that we will be discussing later on, and we will also go into details on whether it makes sense for you to retain that card past the first year and pay the re-curring fees on it.  As I will shortly present, sometimes that $450 yearly fee can pay for itself completely, so do not be intimidated by the numbers alone but it’s good to be aware of them.

The second point is International Fees.  OFten times these range anywhere from 1.5-3% of the total purchase price that you’re making from an over-seas vendor (buying a product in their currency vs. US dollar) or if you’re actually traveling internationally and go into a store and purchase something there.  If you travel often you should aim for cards that have no international fees, or if the card has other benefits then make sure not to use it for such purchases (my main daily card has hefty international fee charges so I always make sure to use it domestically only, because it’s such a good product).  
So hopefully this article laid out the basic principles and gave you a better and broader understanding into a few of the many nuances of award travel.  We will explore each of the key subjects presented here in future posts in much more detail with tangible examples that you can start using immediately.  As always, if you have any comments or quesitons please feel free to reach out todirectly or leave them in the comment section below.

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