The World of Credit Card Miles and Points
I have just returned from a wonderful trip to Europe with my family. We flew to Spain, then to Germany, drove to Italy and flew home from Milan to San Francisco. And, we “paid” for all of our flights using miles strategically accumulated through the use of credit-card points/miles programs. We have a good friend who consults on this topic, who helped us put together a strategy to garner enough miles on the right airlines to make this happen (Thank you Danny!). That being said, getting this many miles was not as easy as you might think and was certainly not completely free. In the long run, I think it was well worth the time, effort and money spent, and we most definitely plan to continue with this strategy in the future. However, in order to make the miles/points game work in your favor, you must be strategic, disciplined and have a well-thought-out and -executed plan of action. With this in mind, I thought it would be a good idea to share with you how credit-card miles/points systems work, and some of the pros and cons to be aware of.
In today’s digital age, credit cards have become an integral part of our financial lives, offering convenience, security, and a plethora of benefits. Among these benefits are credit-card miles and points, which incentivize spending and reward cardholders with various perks. Credit-card miles and points are rewards programs offered by specific credit cards to encourage spending and customer loyalty. These programs enable cardholders to earn miles or points for each purchase made using their credit card. The accumulated miles or points can then be redeemed for benefits such as free flights, hotel stays, upgrades, cashback, gift cards, and more.
Credit-card miles and points accrue based on predetermined criteria established by the credit-card issuer. Generally, cardholders earn a certain number of miles or points for each dollar spent on eligible purchases. For example, a credit card may offer one point per dollar spent on regular purchases and two points per dollar spent on travel and dining. Additionally, credit-card sign up, or “welcome” bonuses can provide a significant boost to miles or points accumulation. These bonuses often require cardholders to meet a minimum spending requirement within a specified time frame. Sign-up bonuses can jumpstart the rewards accumulation process, allowing cardholders to earn a substantial number of miles or points early on. Once a cardholder has accumulated a sufficient number of miles or points, he or she can redeem them for various rewards.
To assess the relative worth of a specific credit-card miles or points program, it is important to consider the exact redemption value for the card being evaluated. And, not all points/miles are created equal. Different credit cards and rewards programs assign different values to their miles or points. Some cards have a fixed value per point, allowing for easy calculation of their worth. However, others operate on a variable basis, meaning the value can fluctuate depending on the redemption option chosen, or upon other factors. It is crucial to carefully review the terms and conditions of a credit card’s rewards program to determine the value you can eventually receive from your accumulated miles or points. Comparing the redemption options against the cost of obtaining those rewards through alternative means, such as paying with cash, can help gauge their actual worth.
While credit-card miles and points offer enticing rewards, it is important to consider the potential costs associated with holding a particular credit card and the impact it may have on your credit rating. Credit ratings can play a vital role in a person’s financial well-being, especially if that person plans to buy a new car, or new home, or start a new business in the near future. Credit ratings influence lenders’ decisions when determining loan eligibility and interest rates. A higher credit rating can result in better loan terms, while a lower rating may limit access to credit, or lead to higher borrowing costs. Several factors come into play as they relate to credit-card usage and credit ratings. Some of the more significant factors are discussed below.
Credit Utilization –
Credit-card usage affects credit utilization, which is the percentage of available credit being utilized. If credit-card spending increases significantly to earn more miles or points, it can result in higher credit utilization. And, higher credit-utilization ratios can negatively impact credit scores. A good rule of thumb is to try and keep credit utilization below 30% of the available credit limit.
Payment History –
Timely payment of credit-card bills is crucial to maintaining a positive credit history and avoiding unnecessary fees and penalties. Accumulating miles and points should not come at the cost of bad payment practices. Late or missed payments can damage credit scores and cost significant money in late fees and penalties, which can quickly wipe out, or at least minimize, the benefits of obtaining the miles/points in the first place.
Frequent Opening and Closing of Accounts –
One of the best ways to accumulate significant points/miles is through the regular opening of new credit- card accounts and receiving the sign-up, or “welcome” bonuses associated with new cards. However, frequent opening and closing of credit-card accounts to maximize rewards may have adverse effects as well. Each time a new credit card is opened, it can lead to a hard inquiry on your credit report, which can temporarily lower your credit score. Additionally, closing old credit-card accounts may reduce your overall credit-history length, which can also negatively affect your credit score. It is prudent to exercise caution when opening and closing credit-card accounts in order to obtain more miles/points, and to consider the potential impact on your credit rating.
Annual Fees –
In addition to the possible hit to your credit score, many credit-card rewards come with annual fees. Some charge fees right up front, some charge fees after the first year, and some do so somewhere in between. Typically, fees are in the $95 – $250 range, but for some cards they can be much higher (The AMEX Platinum Card, which provides a ton of benefits, will cost you $695/year!). Failing to pay these fees, or closing a card to avoid them, may impact the average age of accounts and credit utilization, potentially affecting your credit rating. It is important to evaluate the benefits and costs associated with annual fees, and consider whether the rewards earned outweigh the fees paid.
More Junk Mail –
One additional “cost” associated with playing the points/miles game is that you are likely to receive a significant increase in junk mail. One of the main reasons credit-card companies offer these programs is so that they can track your spending patterns and then sell this information to other companies. It is sometimes possible to opt out of information-sharing practices, but in order to do so, you must be proactive and diligent in checking the right boxes.
Credit-card miles and points programs offer enticing rewards for everyday spending and, if managed correctly, can provide significant benefits to the card holder. However, the pursuit of miles/points should be balanced with an understanding of their potential costs and impact on credit ratings. Responsible credit-card usage, timely payments, and strategic account management are crucial to maintaining a positive credit history. With that in mind, if you do decide to play the credit-card points/miles game, it can be a fantastic way to get out there and see the world! Wishing you all wonderful, affordable, and safe travels this summer and beyond.
Disclosures
The commentary on this website reflects the personal opinions, viewpoints and analyses of the Topel & DiStasi Wealth Management, LLC employees providing such comments, and should not be regarded as a description of advisory services provided by Topel & DiStasi Wealth Management, LLC or performance returns of any Topel & DiStasi Wealth Management, LLC Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Topel & DiStasi Wealth Management, LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.