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| Credit Answers > Debt Resources > Credit Card Debt Help > Reward Cards |
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Using Reward Cards
Some credit card companies offer rewards cards, which can be used to earn a free airline ticket. These rewards cards are called frequent-flier-miles cards or flight cards. With these
cards, a card company and airline join forces. You earn miles with the airline's mileage program whenever you use the card for new purchases.
Most frequent-flier-miles cards accrue miles at the rate of one mile for each dollar in new purchases. Often, you receive a few thousand miles when you join the program. After spending
$20,000 to $25,000, you redeem your miles for a free ticket on the participating airline. The standard reward is a round-trip economy-class ticket for travel in the U.S.
Frequent-flier-miles cards charge an annual fee that usually ranges from $50 to $100. Some cards may award miles for transfer balances. Most of the card programs limit the number of
miles you earn in a year.
To help you decide whether a frequent-flier-miles card is a good deal, compare the cost of earning a ticket with the rewards card versus buying the ticket at the current price. Your
cost depends, in part, on how you use your card.
For example, let's say you visit your relatives on the West Coast once a year. The current price for a round-trip airline ticket is assumed to be $500. You're evaluating four flight
card offers, shown below:
| | Card A | Card B | Card C | Card D |
| Interest rate | 16.0% | 14.0% | 12.0% | 10.0% |
| Ave. Monthly Balance | $1,000 | $1,000 | $1,000 | $1,000 |
| Ave. Yearly Interest | $160.00 | $140.00 | $120.00 | $100.00 |
| Annual Fee | $50 | $50 | $50 | $50 |
| Total yearly cost | $210.00 | $190.00 | $170.00 | $150.00 |
Each card requires 25,000 miles to earn a free ticket. Each has a $50 annual fee, and the most you can earn in a year is 10,000 miles. You charge at least $10,000 a year in
purchases.
The yearly limit of 10,000 miles rules out a free ticket until the third year. Nevertheless, if you pay off your card balances every month, your only expense is the annual fee.
In this case, any of these card offers are a good deal. Your total outlay is only $150, well below the current ticket price.
Next, assume that you have an average monthly balance of $1,000. In this case, Card D is the only profitable decision, based on current interest rates. Card D costs you about $450
over the next three years to earn an airline ticket worth $500. The next-cheapest card, Card C, would require spending $510 over the same period, or slightly more than the
airfare.
If your average monthly balances were $2,000, however, none of the cards would reach the break-even point. Again, this analysis is based on current interest rates. Rates may rise
or fall, and the price of West Coast airfare in three years may also be different. However, this kind of analysis can help you to understand the pros and cons of using a
frequent-flier-miles card.
In addition to frequent-flier-miles rewards, there are also cash and merchandise rebate cards. You should treat these cards in a similar fashion as frequent-flier-miles cards,
carefully reading the terms and conditions of the card offer.
The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax
adviser.
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