As an entrepreneur, I understand the value of saving a dollar. Credit card companies want my business, and that's why I constantly receive stacks of card offers for my business -- with a laundry list of rewards, points and other perks. The downside of taking advantage of these offers is the potential for paying recurring interest charges.
But even with finance charges and fees, three-fourths (74 percent) of cardholders feel that their rewards credit cards are saving them money each year. And nearly 70 percent of respondents say they love their credit card, according to the recent Capital One Rewards Card Outlook. I've built multiple businesses by finding innovative solutions to problems, and by challenging conventional wisdom. With rewards credit cards, I decided to dive in and figure out what was real and what was marketing fluff.
1. For Frequent Flyers, Airline Miles Make Sense
Virtually every airline has partnered with card companies to allow passengers (and cardholders) to earn miles, hotel discounts, Uber credits and other travel perks. The promotion works well for airlines because cardholders are incentivized to book their flights through the airline. And travelers can accumulate loyalty points.
But airline miles can expire after a certain period, and it's part of the reason that more than $16 billion worth of earned miles went unused in 2010. Consider how many miles you think you'll accumulate in a given year. If you believe you can consume those miles (and not let your loyalty rewards go to waste), then it may be prudent to acquire a rewards card that offers travel perks. But if you barely fly once a year, it could be hard to justify the use of an airline credit card.
To avoid wasting your benefits, know what you're signing up for. Nearly two-thirds (65 percent) of rewards cardholders don't consider themselves knowledgeable about credit card rewards programs, and 60 percent of millennials surveyed indicated that they are not sure they are making the most of the rewards they earned, according to the same Capital One survey.
Airlines have figured out that we love loyalty points, and they aren't alone. A 2015 Colloquy study shows that specialty store loyalty memberships now total 434 million, exceeding airline frequent flyer memberships (356 million) for the first time. Credit card reward programs top the list with 578 million memberships.
Blackout Dates and Other Limits on Redemption
Unfortunately, it can be difficult to redeem all those earned miles. Alex Dalton, a travel industry veteran, shares this perspective: "Credit card mileage use is a headache for both clients and travel agents. It is rarely possible to use a combination of airline miles with the travel packages that agencies offer."
Dalton adds: "In the instances where clients can utilize their airline miles, they ask agents to spend extra time researching different methods to maximize the value of their points or miles. Every year, seat upgrades become more expensive for those using airline miles. And, the airlines are becoming increasingly creative when finding ways to limit how airline miles can be applied. The GDS system that travel agents utilize to manage travel itineraries could be incorporated into the airline's miles system, removing much of the headache. But, until that happens, airline miles will continue to be a pain point in booking travel."
His thoughts reinforce my belief that airline miles are rarely worthwhile for individuals who travel only once or twice a year. For frequent flyers, redeeming all those miles can be a source of frustration.
Jason Steele, a travel and credit card expert, recently shared that "... redeeming airline miles at the best rate is such a challenge, that there now exists a cottage industry of travel experts that charge hundreds of dollars in fees in return for generating the most value for cardholder miles."
2. Additional Travel Benefits
Card companies are working on improving the process of redeeming miles, and many will continue to cater to frequent flyers by providing value beyond earning miles. For example, products such as Capital One's Venture card offer cardholders the ability to use their miles on any airline, any flight, any ride share, any hotel, anytime with no blackout dates. With every purchase, cardholders earn unlimited double miles, while having no foreign transaction fees. See what's out there in the travel marketplace for you.
I recently traveled to Dubai, UAE, and I was shocked at how quickly my foreign transaction fees added up on my card statement. Fortunately, I used a credit card that reimbursed such fees. After spending about $3,000 I was reimbursed over $90 in foreign transaction fees -- those savings covered my annual fee.
3. Cash Back Card Rewards - Free Money If You Can Avoid Carrying a Balance
Cash back rewards boil down to exercising some personal discipline. In a world where we're seeing an increasing number of retirees with significant credit card balances, financial discipline becomes a virtue. The math says that if you open a credit card with zero annual fee and cash back rewards, like the Capital One Quicksilver card that earns 1.5% cashback on every purchase, you could -- in theory -- get the credit card company to pay you each year.
Again, to make this loyalty points system worthwhile, you must never carry a balance that generates monthly interest. And some cards require you to shop at specific stores in order to qualify for cash back. If you believe you're the exception to the rule, and can avoid carrying a balance, cash back rewards could be an opportunity to generate some extra cash flow.