Airline-sponsored bank credit cards are a great deal for the right
consumer but unfortunately for most Americans they represent a raw deal.
If you consistently pay-off your credit card balance each month,
charge everything you can including business-related expenses, and fly
frequently on the same airline, then these cards are right up your
alley. For some, they are truly a free lunch.
But for the rest of us working stiffs, who make minimum or partial
payments on our credit cards, have meager incomes, and rarely fly the
friendly skies, the costs of owning an airline card far outweigh the
benefits.
The deep dark secret of airline-sponsored credit cards is that they
award consumers about 1.4% of their purchases back in the form of air
miles but overcharge on the interest rate about 5.9%. To make the deal
even worse, these programs will charge you a hefty annual fee to play
the air miles game. Essentially, these programs give with one hand but
take back five-fold with the other. Vegas would drool at such a
lose-lose proposition.
To determine how expensive these cards can be for many consumers,
CardTrak® ran the numbers on 11 U.S. carriers who offer cross country
travel and who sponsor a credit card in the USA.
First we decided to find the round-trip coach fares for an east coast
to San Francisco flight during the week of December 22nd and 29th. We
opted for non-stop flights or, if not available, then a flight with a
maximum of one-stop each way. Then we determined how much you would have
to charge on the airline's credit card to earn the same ticket for free
and how long it would take to earn a free flight if you charged about
$1,000 per month. We found the average air fare was $338. If we wanted
to earn a free ticket it would take you a little less than 24 months and
you would have to charge $24,300 during this period.
Next we looked at the annual costs for owning an airline bank credit
card if you consistently carried a $3,000 balance. We found the average
annual fee was $51.09 and the average interest rate was 14.35%. (All of
the airline cards carried a variable interest rate based on the prime
rate. Nearly all charged 9.99% over the current prime rate.) The annual
costs for maintaining the card averaged $482.
To get a fair comparison of the difference in the costs between an
airline-sponsored bank credit card and other plain vanilla cards, we
determined what the same bank charged for their lowest rate card. We
found the average lowest rate deals carried no annual fee and an
interest rate of 8.46%.(About half the issuers offered low fixed rates
instead of variable rates.) The annual costs to own such a card average $254 per year.
The difference in the cards issued by the same bank ranged from $183 to
$320. The BofA America West card had the lowest differential while the
Chase Continental card had the highest spread. On average, the airline
cards cost $228 more per year to own than cards with low rates.
Since it generally takes more than one year to earn a free ticket, we
determine how much extra it would cost to own a card during the period
you are accumulating your miles or points for a free ticket.
We found that on average it will cost an extra $408 to earn a free ticket.
Finally, we compared the extra cost you would pay to earn a free ticket
against the cost of coughing up the cold hard cash. For three card
programs you would come out ahead. The America West, Frontier, and
Southwest programs will save you between $13 and $91. But with the rest
you would have overpaid from $38 to $343. On average, these programs
cost about $70 more than the cost of just purchasing the ticket.
If you are considering an airline-sponsored bank credit card make sure
you get out your calculator and compare with other stripped-down cards.
You also might want to get out a magnifying glass for the fine print.
Some programs limit how many miles you can earn in a month or a year.
Finding a free seat could also be a challenge since the airlines
generally allocate only a few free seats unless you are willing to
pony up more miles. And finally, remember that these programs could bite
the dust any time and with very little notice.
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