With new frequent-flyer fees, cash-back cards make more sense than ever for most consumers.
Remember S&H Green Stamps? I sure do. When I was a kid I used to I help my Aunt Freda paste them into books and then she'd trade them in for toasters and clock radios and the like. The company is a shadow of its former self, but still exists, sort of, in the guise of S&H Greenpoints.
The American public’s fascination with Green Stamps started to wane in the 1980s, and turned instead to frequent-flyer miles and points. But there's one big difference between the two types of programs: you could always spend your Green Stamps as soon as you had enough to buy something. But “spending” frequent flyer points is getting harder, and may get harder still as airlines make fewer seats available and increase the number of miles required for various awards.
The airlines do hand out hundreds of thousands of so-called “free” seats each year, it’s true. But if you’re earning frequent-flyer miles with an airline-affiliated credit card, chances are you’re paying a hefty annual fee to the credit card company. And now there are new fees for cashing in frequent-flyer miles and the old fees have been jacked up.
You’ll pay up to $100 for some frequent-flyer credit cards annually, and over at Delta and US Airways you’ll pay up to $50 for cashing in miles (I’d be surprised if other airlines don’t add this fee). That's not to mention a penalty of up to $100 if you cash in those miles at short notice, and another $50 to $150 should you decide not to use your ticket (a “redeposit fee”). Oh, and there’s a fee of up to $30 should you need to speak to an airline representative during the transaction.
To see how widespread these practices now are at U.S. airlines, take a look at this Airfarewatchdog.com frequent-flyer fee chart, which compares the fees the airlines now charge for reservations activities involving frequent-flyer miles.
It's true, airline credit cards do hand out generous sign-up bonuses to snare you: 20,000 miles is typical. And it's also true that some frequent flyer awards are good value if the price you’d pay to buy the ticket is exorbitant (such as a first class international round-trip that might cost $15,000 but can be had for 150,000 miles).
Not worth the hassle?
But if you’re like most people and you cash in your 25,000 miles for domestic flights costing $300, $400, $500, or even $600 round-trip, then miles earned with frequent flyer credit cards may just not be worth the hassle any longer.
Instead, let’s look at $25,000 spent in various categories on what are arguably the two best cash-back rewards cards available: the American Express Blue Cash and Chase Freedom cards, both of which have no annual fee.
The Amex card pays 5 percent back on groceries, gas station purchases, and pharmacies, and an industry leading 1.5 percent on everything else. The Chase card pays 3 percent back on whatever your top three (of a possible 15) spending categories are in a given month, and then 1 percent on everything else, plus a bonus $50 back with your first purchase. That's much better than paying $50 in order to cash in frequent-flyer miles.
As you can see from this chart, a typical family could easily earn almost $700 with the Amex card in a year, or nearly $450 with the Chase card, assuming a spend of $100 a week on groceries, $3,000 a year on gas, $1,000 annually on drugstore/ pharmacy purchases, and the rest of the $25,000 on other categories.
Clearly, if you spend more in various purchasing categories than the amounts we’ve allowed for, these cards might be an even better idea.
Here are some more reasons why cash-back cards make more sense than frequent-flyer credit cards:
- The nice thing about cash is that no airline is going to tell you that your cash isn’t good here any more, as they might with miles. (Ever try to use frequent flyer miles to Hawaii? Hah!)
- There are no capacity controls on cash.
- Chase and Amex aren’t going to go bankrupt; your airline may and there go your frequent flyer miles (just ask all those folks who had miles on Aloha Airlines).
- There are no fees for spending your cash on an airline fare.
- There are no annual fees for your cash-back credit card.
- And for $500 or $700, you can buy yourself a pretty fine airline ticket, even an international one, or even one to Maui.
Cash in 25,000 miles, in contrast, and to obtain and use those miles you’ve already paid up to $150 in credit card fees and booking fees, so the cash earned from a no-fee cash-back card looks even better.
To repeat, there are tickets for which miles make sense, such as international business and first class. But if you’re like the vast majority of Americans who don’t even own a passport and sit in the back of the plane, listen up: Frequent-flyer miles, like my Aunt Freda’s beloved Green Stamps, aren’t what they used to be. Take the cash instead.