As airline credit cards crash and burn, cash-back cards are taking off
April 23, 2014 | Jason Steele
At the end of February, Delta Airlines shocked frequent fliers when it announced a radical change to it SkyMiles program. Starting next year, instead of earning a free mile for every mile you fly, Delta will offer miles based on how much you paid for your ticket. The more you pay, the more miles you receive.
Delta’s move is something other airlines are sure to copy. In fact, it comes on the heels of recent announcements from many airlines that passengers will need to fly more miles to book award flights. As airline credit card users learn that their miles aren’t taking them nearly as far, many are asking, “Should I just switch to a cash-back card and forget those airline cards?”
The answer is: It depends on your situation.
The case for cash-back credit cards
Many years ago, the best cash-back cards only returned 1 percent of the amount you spent. Back in those days, 25,000 frequent-flier miles was all you needed for a round-trip domestic flight in economy class, with very few restrictions. Such a flight was easily worth more than the $250 you could’ve earned with a cash back card.
But today, the tables have turned.
Cards like the Quicksilver from Capital One now earn 1.5 percent cash back on all charges with no annual fee. At the same time, 25,000-mile domestic flights are now scarce — only available when booked long in advance, and you must be extremely flexible with your travel plans. Combine that with the rise of discount carriers like Southwest and Jetblue, and the value of these award flights has dwindled to the point that cash back cards will usually deliver more value.
In fact, some cash back cards offer even more than 1.5 percent. For example, the Fidelity Rewards American Express offers 2 percent cash back toward one of its college or retirement accounts, and the Capital One Spark card for business also offers 2 percent cash back.
Some cards offer 3 to 6 percent cash back at specific categories of merchants such as gas stations and grocery stores. For example, American Express Blue Cash Everyday offers 3 percent cash back at U.S. supermarkets on up to $6,000 per year in purchases.
The power of airline mileage cards
Just because cash-back cards have skyrocketed in value and frequent-flier miles have dropped doesn’t mean you should give up on airline cards. Frequent-flier miles can still be tremendously valuable for premium-class international travel. For example, American Airlines still offers round-trip business class tickets to Europe for 100,000 miles. These tickets are worth $4,000 to $8,000, so it’s possible you can receive 4 to 8 cents in value per dollar spent.
That said, several obstacles can prevent airline-card users from enjoying these same flights in business class. First, you’ll need to spend heavily or fly frequently in order to earn the hundreds of thousands of miles necessary for these awards. Thankfully, the banks make this task easier by offering tens of thousands of miles to new applicants in the form of sign-up bonuses.
Next, you’ll have to find award availability at the lowest mileage levels. This requires advanced planning, flexibility, and some research skills. Finally, you’ll often be faced with hundreds of dollars of government taxes, as well fuel surcharges and booking fees imposed by the airlines. Nevertheless, many cardholders are willing to pay a few hundred dollars to enjoy a ticket that would’ve cost thousands.
The credit card market is extremely competitive, and there will always be reasons for some cardholders to favor either cash-back or airline mileage cards. If you don’t want to spend hours researching the details, Debt.com has you covered. Check us out every Wednesday for credit card advice that cuts through the noise.