I have been catching up with some old friends lately, and I have been trying to explain reward cards and loyalty programs came to be.

In The Beginning…

Have you ever been to a dry cleaners or a sandwich shop that hands out a loyalty card.    The idea is that when you make so many purchases, you get a reward, typically a free product or service.     From the consumer’s standpoint, it is something for nothing, while from  merchant’s standpoint, it has been shown that consumers will return to earn their award rather than try a competitor.    In 1981, American Airlines was the first major airline to apply the same principal to air travel.    In this case, the passenger ear miles towards a free ticket.      One mile was earned for each mile flown.     To this day, it is a mystery to me why they chose Statute Miles over the world standard Kilometers, or the aviation standard, the Nautical Mile.    Indeed, South American Carrier LAN actually does use Kilometers.    What might have made the most sense was earning points based on dollars spent, but since when have the major airlines ever been accused of trying to make sense?

Later, airlines started offering ways to earn miles without leaving the ground.    Credit cards were an obvious way to this.    Merchants have been in the credit card business for a long time.   My parents like to tell the story of their first credit card from Sears, sometime in the late 60s or early 70s, that had a credit limit of $50 or so.    Later, my parents used their credit history to obtain a card at  the gas station, before finally getting a standard credit card.    How quaint.   Not long after frequent flier programs began, airline branded credit cards were offered that earned miles, typically one mile per dollar spent.    As the dollar lost value to inflation, miles earned through credit cards became much easier to earn.    The value of the dollar decreased substantially since the 70s while the world stayed the same size.    All I need to do now is find a credit card that offers a frequent flier point per Zimbabwe Dollar that I spend, and I should be earning around the world flights on my lunch break!

At the same time, airlines began offering miles through travel partners such as hotels and rental car companies.   Eventually, you had the opportunity to earn miles on just about any purchase from the Home Depot to hair loss treatments.

Today

It is far easier to earn miles with a credit card or an airline partner than it is to step on a plane.   For example, you could take a last minute flight from Washington Dulles to Roanoke Virgina for $470.     You will only earn 177 miles from the flight itself, but you could earn at least 470 miles or points with your credit card while you pay for the flight.  That is an extreme example.   A more common example would be a flight from Denver to Atlanta.   It is 2,400 miles round trip, and an advanced purchase fare is often around $300.    So you are earning 8 miles per dollar spent.    Many shopping partners offer similar or more mileage per dollar spent.   Credit cards typically offer a single point or mile per dollar spent on anything.

For very frequent fliers, they will probably earn more mileage in the air than on the ground.   I am talking about people who travel at least two or three times a month.    Even then, they can earn tremendous mileage with partners, enough to outstrip their actual BIS (Butt In Seat) miles.    For the rest of us, we can now earn thousands of “frequent flier” miles without ever leaving the ground.

More Than Just Miles

Of course, along with miles came other loyalty programs and point schemes.   Hotels and rental car companies got into the act with similar programs.   Credit card companies started offering their own point schemes as well as the most attractive option, cash back.    Every time you use your credit card, the merchant has to pay 2-4% of the purchase price to the credit card processor.    Your bank is using a percentage of those funds as a bribe to entice you to use their card.    Currently, the best cash back cards give you 2%, a pretty substantial rate of return.

Simply put, if you are not utilizing reward cards, you are leaving a lot of money on the table.    With a basic 2% cash back card, someone who spends $30,000a year ($2,500 a month) is earning $600 in rewards.    Since the rewards are merely a discount on your purchases, they are not taxable.    Think of it like a $1,000 a year pre-tax raise on your salary.    Savvy reward card users can find rewards out there worth 4 cents on top of every credit card dollar spent, or even more.

The Most Important Part

The whole idea of earning reward points and miles with a credit card is predicated on the idea that you will ALWAYS be paying your credit card balance IN FULL and ON TIME.    Failing to do so means that you have lost the reward card game, as the interest and late fees will always exceed any reward.

My Advice

Read this blog and others.    Learn the ways of reward cards and you can profit greatly from your everyday spending habits.

I was speaking with one of my cousins last week on my trip to Israel.    They are actually living in South America, and had flown all the way to Israel for the same reason as me, to visit with family.    At one point, they were inviting me to visit them in South America and giving me an idea of what the airfare would cost, and I found myself interrupting to say, in a rather matter of fact manner; “I Don’t Actually Pay For Airfare.”

How I Got Here

Of course, I was in Israel, due to my rapid accumulation of Delta SkyMiles when they had a short lived promotion some time back.   Later, I took to churning American Airlines credit cards.    I was then quickly able to earn miles for trips to St. Thomas and Brazil later this year.    I even took advantage of a 40,000 mile sign up bonus for Frontier Airlines credit cards, for which I hope to redeem for a visit with family in Atlanta later this year.    Finally, I went all in on TrackItBack during the US Airways holiday promotion.    I am hoping to use those miles to visit my cousins in South America in the next year or so, or perhaps for my next “falafel run” to Israel in a couple years.    Either way, I am not concerned with the actual price of the trip, since I am not paying for it with dollars, at least not directly.

I Do Pay For Airfare

I collect frequent flier miles without flying.   Credit card sign up bonuses and spending are a big part, but so are promotions.     Ultimately, there is a cost.    With the US Airways promotion, the cost works out to about .5 cents per mile.   I am not flying for free,  but my South America trip might end up costing me $300 each if we fly in coach, or $500 each if flown in business class.   In terms of miles earned through credit cards spending,  there is an opportunity cost of the cash I am forgoing by not using a cash back card.   Throw in the ubiquitous “taxes and fees” and it is clear that there is no longer such a thing as a free ticket, if there ever was.

What I am getting is an airline ticket at a vastly reduced price.    There is no way to argue that $500plus maybe $100 in taxes and fees is a great price for a business class ticket to South America.   Frankly, you would be lucky to find a coach ticket for double that.  To say “I Fly Business Class for Half the Price of Coach” is more accurate, if a bit convoluted.

What I Lose

For me, travel is about as spontaneous as having a baby, as I am now planning trips almost a year out, and sometimes more.    For example, I came across the US Airways promotion in early December of 2009.    They won’t give the miles out until the end of February of 2010.   Only then might I be able to start looking for a ticket for January 2011, but I might even look further beyond if I want the best availability.    Frankly I miss, booking a trip 3 weeks out.    Trips are never as good as you imagine when you have 10 months to contemplate them.   Worse, the airlines will change your schedule several times between the time you book your ticket and when you actually go somewhere.

What is the Pattern?

In each case, I followed the travel blogs closely, along with various forums on FlyerTalk.   There are a lot of smart people out there looking for loopholes, promotions, and other legitimate ways to come up with lots of miles for little or no money.     Almost all of the deals I described are no longer available.  Had you been reading this blog, you would have known about each and every one of them as they arose.   The good news is, that there are still plenty of good deals out there.     For example, Chase Bank/British Airways card is still available with a 100,000 mile sign up bonus and a companion ticket after $30,000 annual spend.     That will get two tickets to Europe in Business class, but you will have a few hundred dollars in fuel charges.   Go in on it with your spouse, and you could both end up in First Class to Africa or the Far East!

Another great deal that just came out today is from United.   You know that this is a good deal if I am recommending something on United, my least favorite airline in the world.    Unfortunately, this deal is for Colorado residents only.    We lucky few can purchase a roundtrip ticket on United to be flown in the next few weeks, say between Denver and Colorado Springs, and receive a free, round trip ticket to any North American destination, including Hawaii and the Caribbean.      They also throw in a couple of upgrade certificates as well.   So $284 ticket and get a free ticket to Hawaii, and possibly upgraded as well.

The point is not to make you non-Coloradans jealous, but to show how there are always good deals out there for those willing to find them.   BTW, it really is nice to live here, deal or no deal.

Chase is obviously one of the biggest banks around and we are going to look at the the Chase Debit Card. The most basic Chase Debit Card is given to those who have a Chase checking account. Like a typical debit or check card, you can use it to withdraw money from the ATM. But you can also use it to pay for bills at retailers just like a credit card. You money will be deducted from your checking almost immediately. Chase offers the following benefits with this card.

Free Rewards Program – Perhaps the best thing about the Chase Debit Card is that it has a reward program (called Chase Extra) that is free in that you do not have to pay an annual fee for it (unlike other bank debit cards). You will earn one point for every dollar that you spend on the card for eligible transactions. Eligible transactions include those which you select “credit” instead or “debit” when you swipe the card and sign it. If you use a PIN based transaction by typing in “debit” and using the PIN number, you will not earn points. You could earn unlimited points and they are good for 36 months.

For debit card reward programs, you typically need to more points to redeem a certain value than a credit card reward program. In this regard, the Chase Extra reward program for their debit card is no different. Below are some screen shots of their reward program.

Verdict – In my opinion, I think Chase has one of the better debit cards around. Firstly, there is no annual fee for the reward program (though the program is what is typically found in other debit card reward programs). In you are seriously looking to earn reward points for a specific purpose, credit cards are the way to go. In fact chase has several good reward cards. But if you have a Chase checking account, then using this card occasionally may bring some surprising rewards once you have accumulated enough points.

I received this (brief) query from someone I know who just got a job where he will be traveling for business:

“So I want to get a new reward card for travel, any ideas?”

I could have been glib and asked him to just read all of my posts here for the last couple years, but lets see if I can condense that information.

Really the answer depends on what you are trying to accomplish.   Your goal should always be to maximize your return ratio.    That is the value of your reward for every dollar spent.    That said, the question arises as to whether or not you should get a travel rewards card or a simple cash back rewards car.

The Travel Rewards Route

Travel reward cards can produce rewards valued at 3-4% of the amount charged, but only when used used wisely, and usually for travel booked well in advance.   If you want to jet off to Hawaii next week, you probably won’t find much value in your miles.   If you can find award seats, they will certainly be for double the miles, and you will likely have to pay an additional redemption fee for travel less than 21 days in advance.

If you are flying one airline most of the time, you probably should get the reward card for that airline, especially if you are able to purchase travel on your own credit card and be reimbursed by your company.    This is because most airline credit cards will give you double miles on purchases at that airline.    Also, just having the credit card will often result in additional airline perks such as companion vouchers, waived luggage fees, and discount lounge memberships, depending on the airline.

The same story holds true for hotels.    If you have the ability to chose which hotel you stay in, and you get to pay for the room on your personal card, then you should probably try to get the reward card for your favorite chain.   You will quickly earn hotel points and status that will result in free rooms and upgrades.

Whether or not your favorite hotel chain is Starwood, which includes Westins and Sheratons, you might just want to get the Starwood American Express card.    Among the reward travelers in the know, the Starwood Card is the gold standard.    It achieves that status because Starwood Points are so incredibly flexible and valuable.   Starpoints can be converted to points at dozens of airlines at 1:1.25 rates.     For example, 20,000 StarPoints gives you 25,000 Delta SkyMiles, better than the Delta Amex.  If you redeem StarPoints for hotels, you get access to Westins and Sheratons at reasonable rates with no blackout dates or capacity controls.    If there is a room available for sale, you can redeem your points for it.   That is just unheard of  these days when it is common to hear from an airline that they have no reward availability to your destination for a reasonable amount of miles for months on end.   Finally, those who spend $30,000 a year on their Starwood Amex get Starwood Gold status, which entitles you to all sorts of upgrades and perks you they stay at Starwoods.

The Cash Back Card Route

As hard as it is for me to imagine, for some people, travel is not their goal in life.    For those people, a simple cash back card is great.    Currently, the best cards out there offer 2% cash back, like the Schwab Bank card.     It is nice to know that if you charge $1,000 in reimbursed travel expenses, you are getting an additional $20 bonus that is essentially tax free.    I am not an accountant or a lawyer, but my understanding is that since this is really just a discount on your purchases, and not money earned, you don’t pay taxes on it.   On the other hand, your company will always reimburse you for the amount you charge, and will never take into account any rewards or cash back you get through your credit card.    The ultimate result is that your 2% reward is probably the equivalent of 2.6% or so post tax value.

Of Course…

None of this really matters unless you are paying your balance in full every month.   If you do, the rewards are a bonus, and you probably even make a little interest on the reimbursements that come in for some time before your bill is due.

If you are not paying your bill in full, you are getting screwed on so many levels.   First, a reward card will have a higher interest rate than other cards.    Secondly, you are paying interest on your charges from the moment you swipe your card, so you are never really being reimbursed for all of your expenses.     In that situation, it might make sense to have a separate card for business expenses only, and be sure not to confuse the reimbursements with your personal bank account.   In that way, you will never be tempted to “borrow” some of your reimbursements to pay your personal bills.    If you have to, you might even consider just endorsing your expense checks to the credit card company and putting them straight in the mail to them.

Play the game right, and your rewards for business travel will be substantial.