Is Your Rewards Credit Card Still Rewarding Your?

hidden dangers of rewards credit cardsConventional financial wisdom for the last 10 years has been that you need a rewards card. Obviously, carrying a balance is bad, but if you pay your debt in full every month, it’s a no-brainer. You put all your expenses on your credit card, pay it off before you’re charged interest, and rack up those airline rewards. You cash those in for free flights, first class upgrades, lounge stays and other perks.

There’s another bit of conventional financial wisdom, though: there’s no such thing as a free lunch. Free rewards sound great, but are you really getting everything you’re promised? Airline companies, faced with rising costs for fuel and labor, have started to cut costs everywhere they can. To understand how airlines save money by cutting your rewards, it’s helpful to understand the rewards systems.

Airlines use miles systems to build loyalty. The more you fly, the more points you get. These points can be used for all kinds of travel perks. The intent of such a program is ensuring you consistently choose the same airline by giving you some kind of reward that’s commensurate with your amount of traveling.

Other companies, mostly major credit card companies, also want to reward you for using your card so you’ll use it more. They buy blocks of reward points from airlines and award them to you for card usage. The airline makes money from the sale and they also use the rewards as a way to promote their services.

When it comes to points, airlines can lower costs in two ways. They can make them more difficult to spend or they can give fewer of them. Right now, things are so bad for the airline industry that they’re doing both.

With the first approach, they make it difficult to redeem rewards. By making popular flights unavailable to rewards program customers, airlines can sell more tickets for cash. They still make the same dollar value from the sale of the miles, but they have to give less back in return. A recent survey of major airlines by IdeaWorks showed a significant drop for most major airlines. United Airlines, for example, had 8.6 percent fewer flights available for rewards members in 2014 than it did in 2013.

In the second tactic, the airlines give fewer rewards. Up until last year, airlines awarded miles based upon distances traveled. Now, according to The New York Times, they’re switching to awarding points based on dollars spent. This means that, unless you fly a lot, regularly make upgrade purchases, or otherwise spend a lot of money on air travel, you’ll be getting fewer rewards.

Given this change in policy, it might be time to take another look at your rewards card. Is it still the best bet for your money? If you’re thinking about cutting the card, check out these factors:

  • Is there an annual fee? If you’re paying money every year to use the card but you’re not getting more than that amount in rewards, your credit card is a losing proposition. Check your billing statement for this information – and don’t forget to check the fine print.
  • Is the interest rate extremely high? If you pay the balance in full every month, you might not ever think to check your interest rate. Suppose, though, that something unfortunate happened – you or your spouse lost your job, you lost track of the date, or otherwise forgot to pay the bill. You could rack up significant financing charges on one month’s expenses.
  • Is there a real grace period on interest? You might assume that if you pay your credit card bill before the end of the billing cycle that you wouldn’t get hit with any interest charges. This might have been the case when you first signed up, but the deal may have changed. Credit card disclosures are often difficult to read, so check carefully.

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