NerdWallet's Smart Money Podcast - Is a travel credit card right for me?

Episode Date: July 19, 2017

From application, to acceptance, to acquiring and using points, NerdWallet card sharks share tips on finding the right rewards program.

Hello, and welcome to NerdWallet's Smart Money Podcast, where we answer your real-world money questions in 15 minutes or less. I'm your host, Sean Piles, and joining me is my co-host, Dayana Yochum. Kick it off, Sean. All right. Today's question comes from Jason in Little Rock. He asks, I've been thinking about getting a travel credit card, but I'm just not sure if it's right for me. How can I tell? Jason, you are not alone here. Travel credit cards are having a bit of a moment right now, and for good reason. Many of these have huge sign-up bonuses. Yeah, like 50,000 points right off the bat. Right, if you spend enough to get it. But that can

basically get you a free round-trip flight. It's a clever bit of marketing, but it can actually be really beneficial to consumers. Consumers like you, right? Yeah, definitely. Yes. Well, if memory serves me right, all of your exotic show-offy travel has come courtesy of your obsessive focus on earning points, right? Yeah. I mean, I'll admit that I was a sucker for that marketing around these cards when I got one about a year ago, just because of that guarantee of a free round-trip flight on the points alone. But then once I used it, I had to work really hard to get back up to that. It took several months and many, many, many dollars to get back up to 50,000 points, but I'm still making it work for me.

So you're on the spend-to-earn plan. Yes, yes. Well, not everyone is Sean, sadly, and only certain customers are good candidates for travel rewards cards. Right. So let's talk through this. First up, do you pay off your balance every month? If not, that is a deal breaker for a travel credit card. Many of these have really high interest rates, and if you don't pay it off every month, that can quickly lead to spiraling debt, and it's just a mess you don't want to touch. And also be aware that you often need excellent credit to qualify for one of these. Right. So next, it seems obvious, but consider whether

you really travel enough to make it worthwhile. If you only take trips like a few times a year, a travel card might not be the best way to use your points. So let's say that you are the ideal candidate. That you're Sean. That you are me. Don't dive in just yet, even if you are me who already has this card. The bigger question for everyone is the cash back versus travel credit card debate. And what we found in a recent NerdWallet study is that in many cases, a consumer could get more value by using a cash back card and then using those cash rewards for paying for travel.

Yep, that's me to a T. Cash rewards to pay for travel. Now let's talk about how to milk this thing for all it's worth. We sat down and grilled nerd wallet writer Greg Karp, who's a former reporter for the Chicago Tribune, and he's been writing about personal finance for over a decade. We got his expert insights. Greg, you're a big deal. Oh, I don't know about that, but I'm excited to talk about travel cards. Excellent. All right. I'm going to start with this question because the big lure for travel cards, the carrot that they're always dangling is the signup bonus and you know that's where you get like the

mountain of points the 25,000 miles 50,000 miles of some some cards so so then what after you burn through the signup bonus is it hard worth worth it to keep even well like so much in all this, it's a big, it depends. But yeah, the sign-up bonus is like the headline feature and the things that the cards are marketing because they can be worth a lot of money, like well over $1,000 in some cases that these sign-up bonuses are worth. So yeah, there's a few things to know about sign-up bonuses.

First of all, you have to be able to earn the sign-up bonus. So that means spending a certain amount of money in a certain time frame. So often it's going to be you have to spend $4,000 in the first three months of owning the card, and then you get the bonus. So you've got to be able to spend that kind of money in order to get the bonus in the first place. You've got to spend money to make money is what you're saying. That's right. I know some of these premium travel credit cards have a signup bonus that can be just gargantuan, but it costs a lot of money to get them. And the annual fee just seems outrageous to an average shopper like me. I'm wondering how you figure out whether it's worth it to get one.

Yeah. So it comes down to the math. And so you got the signup bonus goes into the equation and also the ongoing reward. So after the signup bonus is done, what are you going to earn afterwards? Are you going to earn two points or two miles for each dollar you spend on dining or how much you're going to earn on travel? Those are two very popular categories, as you might imagine, for travel cards is dining and travel. So what are you going to earn on an ongoing basis as you spend money with the card? So that all determines whether it's worth it. And now there's a lot of cards that have, you know, $95 annual fees, and then others that have like $450 annual fees, some even $500.

Whoa. So, yeah. What are you getting for your money when you pay that much? Are they better rewards, I guess, is the question. Yes, they are definitely better rewards. There's no doubt about that, but you got to do the math. Are you going to use the rewards, right? That's what it comes down to. So a lot of the premium cards that charge the $400, $500, they give you a travel credit, for example. And what that means is that when you use the card on travel, it automatically erases some of your spending. So if it has a $300 travel credit, when you spend on travel,

and they have different definitions for travel, but say it's an airline ticket, they just wipe out $300 worth of your credit card bill. So that mitigates the $450. So all of a sudden, you're down, if you're $450 annual fee and you have a $300 travel credit, now you only have to make up $150, assuming you're going to use the travel credit. So yeah, so it can come down quickly. And then there's other things. There's lounge access is a big one for the expensive travel cards. So how important is that to you, the airport lounge access? That can be an oasis away from the hub of when you're delayed as we are so often nowadays. So these are really for the um like the most frequent travelers out there would really make this worth it i would say when we're talking about premium cards yes you have to travel a lot in order to get enough benefit from the perks to make it worth the annual fee and then there's the

there's the difference explain this to me of a co-branded card like or like I've got a cash back card or I can switch over and and my spending earn smile versus a general travel card sorry scratch all of that is it so what is the difference between a co-branded card and a general travel card I'm assuming it's uh when I whip out the plastic, it says, you know, American Airlines or Alaska Airlines Visa. Yeah, that's exactly it. So co-branded just means that the travel company, whether it's a United American Delta,

they have a name on the card and they can offer certain perks that you're not gonna get with a general travel card. So the difference here is an American Airlines, Delta Airlines, United Airlines card can, and this is a big deal, give you free checked bags. And if you think about it, that's what, $25 each way, right? For a single person, two people going up and back, that's $100 right there. All of a sudden, you've paid for a $ 95 fee in a single round trip with a couple and i can bring all all of my shoes can come with

me exactly then you can check it and not have to love that around the airport right actually i get angry with myself if i have to bring more than just the pair of shoes on my feet. I don't want to get the reputation as an overpacker, okay? So the general travel card is different, though. That is you earn points, and then you can essentially erase travel expenses from your statement. In fact, you get a statement credit for travel expenses. So that way, they're not linked to a particular airline or hotel. So you can use it on any travel. So that makes them more flexible in that way. Right. All right. I want the total insider tips. So we know, you know, well, it's a good season to

shop for bathing suits or cars. Is there a season? Is there a good time to sign up for a travel card? Sorry, let me just say that again. So Greg, let's get into the real insider tips here. Is there a good time to sign up for a travel card, like a season? There is, you know, there's a seasonality to how high the bonuses are and

that's because there are limited time offers with these sign-up bonuses and that's where you're getting your big value on the front is the bonus so uh airline cards for example have big bonuses in the going into the summer flying season so uh that's when they tend to have their limited time offers that they might even double their signup bonus, which is really, really lucrative and much more valuable than if you applied in the other part of the year and got only half that amount. So there is some seasonality. And unfortunately, there's no single month that's good for all airline cards or all hotel cards or all general travel cards. But you can kind of get a sense for it if you go onto the NerdWallet site and look for some of the limited time offers. That's a very smooth plug. I like it.

One thing that I've been thinking about and shopping around, I've been having a hard time discerning what these different gargantuan amounts of points actually mean. I saw one card that had about $20,000, I think it was, and that equaled a $500 flight. And then another card where it was $50,000 for also a $500 flight. So there seems to be some inflation, and I'm just not quite sure how to navigate it. How do you approach viewing these different point values? Yeah, it can be difficult until you kind of get into it. So there's two sides of this whole reward game. It's the earn side, and that's accumulating points, and the burn side, how you spend the points once you have them.

And so the value from a program comes from how quickly you can accumulate them in the first place and then how valuable they are when you spend them. So, and that varies from program to program. It's going to be different for Chase's program than Citi's program. And a lot of these cards have travel platforms where you actually go go in it's like their own version of kayak or one of these booking uh modules and you can go in there and uh book on there and you get more value for your points than if you had spent them a different way so

um yeah there's some details to know with these cards, all the travel cards. Yeah, it sounds like a full-time job. So I hate to end on a downer, but relatedly, I want to know what mistakes to avoid. What are the biggest blunders you've seen people make with travel rewards cards? Yeah, so there's several. First and foremost is spending too much to earn the miles or points in the first place. These aren't freebies. You're not getting a one-to-one benefit from these rewards when you go out and spend more at the mall than you would have otherwise because you're getting your miles.

And the other one we just talked about was knowing all the perks of the card because there are a lot of details to know, especially some of the premium cards. You're going to want to know the perks because you're not getting full value if you're not familiar with them. And as a big kind of headline rule of thumb, you want to get at least a penny per point for your miles. So what does that mean? If a typical flight is $400 round trip and you're spending 25,000 miles or points to get it, that's a good deal because that's 1.6 cents per mile. So you're over a penny. So that's a good deal. But spending 50,000 miles on that same flight,

not such a good deal. That's only 0.8 cents per mile. So use that as kind of the break-even, especially if you can start pushing towards 2 cents per mile or point, then you're getting really good value on the burn side. Great. Well, Greg, thank you so much for walking us through the mileage math and all the other tips for travel cards. Thank you. Thanks for coming on, Greg. I really appreciate you helping us out with this. I feel a little bit less lost here.

Yeah, for sure. And check out the best travel cards, best airline cards and best hotel cards on nerdwallet.com. Done, done and done. The earn and burn thing. That thing, that's actually pretty catchy. It's really catchy. Anyhow, let's get into our takeaway tips. Yes, here we go. So first up, on the earn side, do you reap more value than you pay? Make sure the rewards you get offset any annual fee the card has. Otherwise, it's just not worth it. Another thing is you also want to make sure that you know what the points are really worth. Remember that point value varies

greatly from one card to the next. And in the show notes, let's include a rundown of various credit card point values, shall we? Yeah, that's at nerdwatt.com slash podcast, plug alert. And point three, know how to use the points that you get. The greatest value that you can get is going to come from spending them on flights, while other goodies like magazine subscriptions will not go as far. Sometimes, don't totally dismiss those magazine subscriptions. They can actually come in handy if your card requires that you do something, some sort of transaction to keep

your accrued points from expiring. So there's that. You can expect your one to two year subscription to Golf Digest. Thanks, Ayanna. In the mail anytime soon. You're welcome. Happy birthday. And that's it for today.

You can get more on this at nerdwild.com slash podcast. Do you have a money question of your own? You can text us or call us at 901-730-6373. That's 901-730-NERD. Or you can email us at podcast at nerdwallet.com. And finally, a brief disclaimer courtesy of the NerdWallet legal team. Your questions are answered by knowledgeable and talented finance writers, but we are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes. And with that said, keep it nerdy!