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Are Rewards Credit Cards Really Worth It?

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Advice from a loyalty points expert

Some travelers seem to be pros when it comes to scoring amazing trips and perks for free using miles and points.

But for others the whole thing may sound like either a dauntingly complicated math problem or, worse, some kind of scam.

The idea that opening credit cards can get you a business class ticket to a first-rate resort in the Maldives sounds too good to be true. Right?

Well, I’m here to tell you it’s true. All of it.

The fact is, you don’t have to use cold, hard cash to cover hotel and airfare costs. Credit card rewards are incredibly powerful tools that are simply too lucrative to ignore.

But I get it: Figuring out how to navigate the system can be incredibly confusing if you’re not familiar with how credit card rewards work.

Below, I’ll explain what your credit card rewards baseline should be, how to decide if you should be aiming for points or cash back, the difference between transferrable bank points and traditional miles, and a few examples of how you can really level up the return on the money you spend on a credit card.  In short, we're going to get you on the path towards free travel. Maldives, here we come!

A Note on Rewards Credit Cards and Interest Rates

Before I get into the nitty-gritty of loyalty cards, I want to make a very important point: Rewards credit cards work best for people who pay their card balances in full each month.

The interest rates on rewards credit cards are higher than on most other types of credit cards. If you carry a balance, you want to focus on getting that down to $0  before you even consider rewards credit cards.  This is because rewards credit cards tend to have the highest interest rates. Those high interest rates are what pay for the outsized rewards. If you’re in the habit of paying off your debts late, you could get into even bigger trouble with these types of cards.

You might also consider a card with a long 0% introductory balance transfer period to help you on that path. We know of almost 20 credit cards with 0% introductory APR periods, some as long as 21 months. Use that time to completely pay off your credit card debt and then, when you are confident you can pay your bill in full each month, it will be time to start your journey into rewards credit cards!

If you already do pay your balances in full each month, read on.

Cash Back or Rewards Points?

The first step toward free travel is deciding between a cash back card and a rewards credit card. To me, the answer is a resounding yes to the rewards cards, but for you it might not be.

If you don’t have the time, energy, or inclination to spend at least a little bit of time learning about how to get outsize value from the points you collect, and if you don’t want to carry more than one card, you may just want to get a 2% cash back card.

But that should be your baseline: Don’t ever take less than 2% cash back on a credit card. Something like the Citi Double Cash card would suffice.

With a card like that, you’ll earn 2% cash back on everything you purchase. So if you spend $100, you’ll get $2 back. Easy peasy.

Cash back calculations are simple to do and there are no ins and outs to learn—but there is also no way to get more than 2% back on what you spend.

Believe it or not, many customers who go this route don’t even have a 2% cash back credit card. That makes no sense. A number of 2% cash back cards have no annual fees, making them close to risk-free, so why accept the 1% or even a complete lack of rewards or cash back that so many cards still offer?

f you already know rewards involve more effort than you want to put in—and I’ll say it again for the people in the back—make sure you have at least a “Citi Double Cash” or similar 2% cash back credit card. At minimum.

If, on the other hand, your goal is to spend as little as possible to wind up sitting in a first- or business-class seat on your next international flight (those lie-flat beds sure are nice!) or staying at a 5-star resort once you land, then read on as we get into how travel rewards credit cards work.

Transferable Points vs. Airline Miles

They may sound similar, but they couldn’t be more different.

Airline miles are tied to one airline’s frequent flyer program. You can only redeem them according to the rules of the program followed by that airline and its partner airlines. That’s it. Airline miles may also come with an expiration date.

Transferable points, on the other hand, are earned by using credit cards issued by certain banks. The most common cards with this type of setup are American Express Membership Rewards, Chase Ultimate Rewards, Citi ThankYou, and Capital One Miles.

What’s special about these programs is that they expand your options for redeeming points across many possible airline and hotel programs.

If you have Chase Ultimate Rewards points, for example, you could choose to transfer them at a 1:1 ratio to World of Hyatt for a nice hotel stay (the kicker: You pay no resort fees or taxes with World of Hyatt award stays).

Or you could transfer your points to United Airlines and combine them with your existing United miles to earn a first- or business-class ticket.

Given the flexibility, transferable points beat airline miles by, well, a mile.

A Few Examples of Incredible Value with Transferable Points

• With American Express Membership Rewards, you could earn 125,000–145,000 points. That would be easy to do with one or two new American Express cards and the associated welcome bonuses you get for spending a certain amount of money within a specified timeframe after being approved for a card.

You could then fly “Round the World” in business class after transferring the required points to ANA’s frequent flyer program. (Japan's ANA, or All Nippon Airways, is a transfer partner of American Express Membership Rewards). This particular award option in ANA’s program allows you to stop up to eight times along the way. "Round the World" is a frequent flyer term that simply means that you fly around the world in sequence, either east or west, making the allowed stops along the way.

Booked with cash, that whirlwind world tour could easily cost more than $10,000. By paying with points, you’re only spending about 8 cents per point on your Membership Rewards points. To make that more clear, if you spent 125,000 miles on a $10,000 ticket, you can divide the cost of the ticket by the points spent to determine the value you got per point. This would come out to 0.08—or 8 cents per point.

• For a one-way business class flight to Europe from the U.S., Delta Air Lines often charges over 300,000 SkyMiles. But because most bank points transfer to Virgin Atlantic, you could simply book the same seat using just 50,000 Virgin Atlantic points. (Fair warning: Availability may be hard to come by.) Because of the way airlines partner with each other, either via one of the three major airline alliances or a direct partnership, when you redeem miles using the award pricing of an airline program you can book on any of their partner airlines, as long as the operating airline has made award space available to them.

There are all sorts of sweet spots out there using one airline’s miles to book a seat on another airline, like booking Delta flights with Virgin Atlantic miles or Qatar Airways' famous business class QSuites using American Airlines AAdvantage miles.

• The Alila Ventana Big Sur hotel in Big Sur, California, is an incredible all-inclusive resort in the best location in town. Rooms start at over $2,200 per night—throw in taxes and fees and the nightly rate comes to around $2,500.

But you could transfer your Chase Ultimate Rewards points to World of Hyatt and book a stay for a fraction of that. The hotel would charge anywhere from 35,000–45,000 World of Hyatt points for a standard room, giving you a value of about 5–6 cents per Ultimate Rewards point—and a savings on that $2,500 room rate. (To check the math again, let’s assume a standard award of 40,000 points and a room rate of $2,500. Divide $2,500 by 40,000 points and you get 6.25 cents per point.)

As good as that sounds, we can actually make it better. If you had a Chase Ink Business Cash card, you might be earning as many as 5 Ultimate Rewards points for every dollar spent, since the card earns 5X points on office supply stores and on cable, internet, and phone charges.

So say you spent $25,000 on your credit card (earning 5X points per dollar in those specific bonus categories). You’d get around $7,500 in free hotel nights in return when you spend the points at this resort. That’s like a 30% effective rebate on your credit card spend. Though an exception to the norm, it’s totally doable.

So Are Rewards Credit Cards Really Worth It?

Emphatically, yes.

If you love to travel, then there is no better way to reduce travel costs—and fly in the front of the plane—than by learning a bit about miles and points, selecting a few of the travel rewards credit cards that best suit your needs, and upping your travel game.

Next time, we’ll talk about some of the key features to look for in a rewards credit card and our top picks for the month.

We also have a full list of top travel rewards credit cards and current bonus offers.