Below is an answer to some questions and concerns left in a comment from my post “What is a Rewards Credit Card?” My answer which I originally intended to be succinct eventually grew, and grew so I just decided to make it a post. Alex of Milk The Pigeon (an excellent blog about finding your passion and fulfilling your dreams) a fellow blogger and an experienced world traveler commented,
“I honestly had no idea about ‘credit card churning’ or the benefit of reward cards. Even after traveling 30+ countries by myself I never ran into someone who knew about them either , or maybe I never asked…
I ended up doing some research (and like you recommended) I checked out rewards cards.
I narrowed it down to a few – chase sapphire, amex premier rewards gold card, + delta sky miles gold card.
I ended up passing on Chase because lots of my expenses are day to day (gas/food) and thus I get 2 or 3x points with the amex premier gold card. I also was already enrolled in the delta card program so I don’t think I could get the “spend 1k in 3 months for XX miles benefit.”
Which cards do you use? I’m weary of the whole credit card churning though — I haven’t done enough research to see whether or not it will affect my credit score long-term.”
I like to call Rewards Travel the “not so secret, secret.” Most people have some type of Rewards Cards but just don’t use them to their fullest potential. However, travel costs aren’t such major concern traveling solo. A lone wolf, or lone Pigeon as in your case, can usually regulate costs pretty tightly. As you’ve experienced and shared on your blog post, “Why Traveling the World is not as unrealistic as it seems.” It’s really when you start traveling with other people that it becomes a problem since your expenses get compounded, often more than double what it would’ve been. My wife got sick of staying in hostels long ago. It stopped becoming an adventure for her after the AC went out while we were staying in one. Of course this happened for a week in the middle of a record breaking heatwave in Madrid!
Keep in mind you should choose your card based on your current needs as well as your future needs. Have a plan for the potential points or miles and make sure that you can use them the way you think you can. Not all Rewards programs are created equal. Reportedly, 75% of all frequent flyer miles expire before they’re used and about 40% of people either rarely or never use their rewards. With that said, I think you’ve picked some good cards and are definitely on the right track. If you go with Chase, think about going with the Sapphire Preferred as opposed to the Sapphire. The Sapphire in general is a favorite of mine because of all of their various transfer partners associated with their rewards program, Ultimate Rewards. For example you can transfer points to most airlines as miles 1:1 and many hotel chains as well, which can help you boost your point redemption rates considerably. Specific to the preferred you also get 2x points on dining as well as travel and a 7% dividend each year on your points. The annual Fee is also waived first year and is relatively low at $95. There is a sweet 50,000 point bonus too. But the nice thing about the normal sapphire, which I’m sure you noticed, is No annual fee.
I think the American Express(R) Premier Rewards Gold Card would be exceptional for you in the short run. It’s a great card and like the sapphire has various airline and hotel transfer partners through the Amex Membership Rewards program. As you noted you can potentially rack up a ton of points using it because you can earn up to 3x points. My concern with that one is the hefty Annual Fee. It’s waived after the first year but $175 thereafter! That $175 fee over time could really eat up any incentive you may get from it. Let’s just take your potential bonus for example. The 25,000 points would normally be good for one round trip domestic flight. Let’s price that at $500. If you keep that card for just three more years after the first year, you’ve spent $525 in annual fees! So Amex has just made back their money and then some. Bottom line is if you go with this card make sure you cancel on the 11th month to avoid the annual fee. You can actually call amex if you get the card to find out the exact date the annual fee will be charged.
As far as the Gold Delta SkyMiles® Credit Card from American Express the biggest pluses with this card are the priority boarding, and the free first checked bag for up to nine people in your reservation. Depending on how long ago you got your original Delta Amex you could actually be eligible for the bonus. If it has been over a year it’s a pretty safe bet you could get the bonus. It could be worth getting if you’re a Delta flyer.
“Credit Card Churning” isn’t for everyone. I outline some of the more important attributes of someone who should be doing this in one of my posts, “Who should use travel rewards cards.” Judging from your blog posts it seems you already have many of the positive attributes of a successful Rewards Traveler. But I also get the sense from your blog that you don’t have a lot of time to dedicate to other things right now. And credit card churning can take a little bit of time and research pertaining to of course the credit cards, but also, particular rewards program or frequent flyer programs, redemption rates, possible transfer partners, awards charts, credit monitoring etc. . . However, it’s definitely doable and doesn’t take an awful amount of time or effort to at least get your feet wet.
As far as credit it’s not too big of a concern if you do this correctly. I’m sure you know, the act of applying for a credit card creates an inquiry on your credit report resulting in a “hard pull” on your credit which will lower your score slightly. But it’s really just about monitoring your credit and the effects of your applications on it. Remember your credit is made of multiple components each bearing a percent weight in the overall score. So despite what you might think it can actually be quite difficult to screw up your credit if you card churn responsibly. Even after applying for and getting 4 cards in the past few months my score is currently a 760 which is still considered excellent. As long as you’re prudent about monitoring your credit it won’t wreck your credit long term. I’ve been doing card churning in one capacity or another since college (I did it then to pay for my college and get 0% interest loans) and my score has always been in the excellent category. Honestly because of how they weight the criteria computing your credit score, many times card churning can actually improve your score. The caveat being of course, IF you do this correctly.
I’m currently using the Chase Sapphire preferred most often because of the the reasons I have mentioned above and it will be an integral part of a honeymoon trip to Peru, Argentina, and Uruguay my wife and I will be taking in May. Before that I was using the Amex Hilton Honors Surpass, and Amex Hilton Honors (you’re not supposed to be able to get both. oops! ;p). In order to get two nearly free nights at the Double Tree Hilton Resort. Basically, I try not to pick favorites but base many of my card using decisions on future travel goals. As a good rule of thumb your go to card should usually be a card that is conducive to an airline you usually fly or that is a hub of your local airport.
Sorry for the long winded response!
I spotted an interesting article on the NPR site. The article is about a study done by economists pointing to the fact that rewards credit card programs may not be rewarding for everyone, someone has to be footing the bill. Despite the age of the article, it’s two years old, I’m sure it still rings true. Essentially the article concludes that based on this study, rewards credit cards are paid for by the poor and that the rich actually get richer from them.
The logic behind this is that the rewards credit cards make everything more expensive for everyone because of the interchange fees they charge businesses to accept credit. Despite the fact that these fees are passed on to and paid by everyone, typically higher income households have more credit cards and utilize them more for purchases therefore getting the rewards back from these credit cards. This creates a net loss for the poorer people and a net gain for the richer people.
According to the economists,“On average, and after accounting for rewards paid to households by banks, the lowest-income household ($20,000 or less annually) pays $23 and the highest-income household ($150,000 or more annually) receives $756 every year.”
At this point in my life, I’m not even close to the $150,000 household income mark, but I do receive substantially more than $756 a year from rewards. I’ll do double that easy in one trip. My next trip, which will be my Honeymoon, will crush that $756 figure by more than $10,000!
So I ask, which side of the fence are you?
My time in the credit card industry was a learning experience. I spoke with hundreds of customers each week explaining to them their terms and conditions of their contracts while servicing their accounts. By doing this I learned to sift through the credit card jargon and discovered how to use my own cards more effectivley. Not surprising, I learned the traits that successful cardholders have. But more importantly, I learned not everyone should have credit cards, especially travel rewards cards. I believe anyone who wants to use Travel Rewards Cards can learn. Heck, this is the point of my blog. I want to inspire more people to travel for less on rewards. With that said, not everyone should use travel rewards cards until they have some basic skills.
The majority of people can obtain some type of travel rewards card. Even if their credit isn’t the best they still could get a lower tier card. Whether they get a lower tier card like the United Mastercard or a higher tier card like the Hyatt Visa Sginature, if they’re not careful, trouble could ensue. There are certain skills that effective travel rewards cardholders have.
Discipline is a rewards traveler’s best weapon. Discipline allows a rewards traveler to meet bonus mile guidelines and avoid unnecessary fees. It is also utilized to implement a strategy and pull off a plan. Organization isn’t far behind. If you’re serious about traveling cheaply on rewards then you’ll probably have multiple cards. This means you have to know the in’s and out’s of each card and rewards program. Also, adaptation should be present in a person. Sometimes things don’t go as planned. When that happens it’s important to stay flexible and keep your eye on the prize.
People who are disorganized, bad with money, and aren’t good at planning shouldn’t be trying for the next big bonus miles offer. If you’re not organized you risk becoming confused about your cards. This could lead to losing out on money saving opportunities. Or even worse being charged unnecessary fees. Furthermore, people who have had problems with debt in the past may want to steer clear of rewards cards. Certainly people with current debt problems shouldn’t even be getting credit cards let alone trying to get travel rewards cards. If you’re one of the above, it’s important to get your situation under control. Once you have it under control then you can begin to acquire the traits necessary to be a successful “Rewards Traveler.”
Traveling on rewards can be a fun way to travel for less that could potentially save you $1000′s of dollars (I know it has for me). However, If you don’t have discipline, organization, or a plan, then I recommend you acquire those skills before you start. If not, you’re in for a bumpy ride that could wreck your credit and leave you still dreaming about sipping magarita’s on the beach.
Bustling through crowded malls, fighting holiday traffic, lugging large bags around that feel like they have a ton of concrete in them, ever been shopping and felt like you were at your second job? Even a trip to the grocery store can be tedious at times. Ever thought it might be cool to be getting something in exchange for all this hard work? Guess what! There actually are people that will “pay” you for buying stuff. And I’m not talking about becoming a secret shopper either. Enter, the rewards credit card.
What is it?
A rewards credit card is any credit card that gives you incentives for using it. These incentives, or rewards points as they’re commonly called, come in many forms. There are rewards cards for gas, groceries, cash-back, merchandise, travel and more. You’ll get a certain amount of rewards points (or miles) for items purchased in the particular specialty of your card. A standard rewards card might offer you 1 point for every dollar spent on all purchases. More complex rewards cards might have different point to dollar values for different purchases. For instance, you might get 1 point for every dollar spent on normal purchases but 2 points for every dollar spent on dining.
What’s it worth?
The redemption rates can vary drastically based on the rewards card you choose. A good rule of thumb is that usually you can expect 1% back in rewards. In other words, 1 point can be redeemed for $.01. So if you have 10,000 points you’ll be able to receive $100 in the specialty of your card. That may not sound like a lot but if you use your card for everyday purchases it can actually add up big time. Not to mention many cards offer 2, 3, 4, or even 5% back in rewards. You can also raise your redemption rate by using your rewards program to its fullest or by transferring points from one program to another.
Differences from traditional credit cards
Rewards credit cards differ from traditional credit cards in a couple ways. The most apparent are the lucrative sign-up bonuses. Some rewards cards offer upwards of 25,000 bonus points or more. Depending on the card, those 25,000 bonus points could mean a roundtrip domestic flight. Other cards may allow you to convert those points directly into cash which could give you up to $250, assuming 1 point = .01. It’s not all gravy, to get the sign-up bonus there is always a spending or transaction requirement that must be met. A more negative difference is that most rewards cards have sky high interest rates. Some card APR’s can be in excess of 19%! Along with those interest rates usually comes a hefty annual fee. These can range from $75 to over $400 depending on the card. With that said there are ways to avoid the interest simply by paying off your card in full each month. As far as the annual fees, many cards waive the annual fee for the first year. If that isn’t an option the fees can sometimes be offset by the benefits of the card, like a lucrative sign-up bonus. Other times you might just use the card so frequently that the annual fee is of set by the benefits you receive when making normal purchases.
How to choose your card
The rewards card you choose should be based on your needs and interests. If you don’t go grocery shopping but eat out it’d make no sense to get a groceries rewards card, instead you might look at a card that gives rewards at a large number of restaurants you frequent. For me, the travel and hotel cards are the best types because I enjoy traveling on the cheap. It’s also easier to get more bang for your points because there are so many travel programs and numerous ways to transfer into and out of programs to maximize your miles.
Of course the potential incentive for the credit card companies could be much more lucrative than your rewards. However, If you use rewards cards intelligently they can be a great benefit. Best of all, once you understand how to use rewards credit cards you can actually beat the card companies at their own game.