Take a moment and imagine your ideal vacation. Whether you’re sipping something cold on a pristine beach, touring through ancient cities rich with history, or reveling in unique and exotic spots around the globe, the common denominator of any trip is the whopping bill you’re left with at the end. Just try to relax and enjoy your wellearned holiday while you’re spending loads of your wellearned money at every turn! With the costs of flights, lodging and car rentals, in addition to the price of the attractions, many dream vacations remain just that – a very expensive dream.
Yet, there’s a way to travel luxuriously without spending money excessively, and ironically, the solution lies in spending money. By being savvy with credit cards that offer great deals for points and travel miles, your regular expenditures on groceries, gas, housing, and tuition can pay for your vacation.
Beware of the Credit Trap
First, a few words of caution. Don’t be so naïve to think that credit card companies are offering glittering travel incentives because they altruistically want to send you on a great vacation. These companies make most of their money from charging interest on unpaid balances. They also profit from latefees, penalty fees for exceeding the credit limit, balance transfer fees, cash withdrawal fees, and often annual fees. Credit cards – or more fittingly “debt cards” – are preying on irresponsible card holders who spend beyond their means, maintain a balance and end up burdened with high interest rates and fees. For those who are unable to spend wisely and make payments on time, it is inadvisable to get into the credit card game, because the benefits of reward points will quickly be negated by paying fees and interest, and the card holder is likely to come out at a loss.
To be fair, not all credit card companies are hoping to profit solely from the financial failure of their clientele. Companies like Visa and MasterCard charge merchants between 2-3.5 percent of every transaction, which comprises roughly 20 percent of their profit. American Express, whose users are unlikely to hold a balance, charges the highest merchant fees, garnering up to 65 percent of their revenue from merchants. In fact, the increase in merchant fees is largely responsible for the boost in generous credit card rewards.
No credit card discussion would be complete without understanding the relationship between credit cards and credit scores. The credit score, which determines a person’s worthiness for a loan, mortgage or credit card, as well as the interest rate charged, is calculated with a formula that takes into account five factors: payment history, credit utilization, length of credit history, new credit, and types of credit used. Yet, the first two considerations, payment history and credit utilization, are the most weighty, comprising 60 percent of your credit score. Many people are hesitant to sign up for new credit cards based on the assumption that it is detrimental to your credit score. But this is only partially true. A credit card company performs a credit pull for each new application, and each pull lowers a credit score by
3 to 5 points, out of a maximum of 850 points. Yet at the same time, getting a new card automatically increases your line of credit, which helps your credit utilization metric as it decreases the amount of available credit being used. Therefore, the immediate effect of a new credit card on a credit score is negligible, and on top of that, the pull affects your score the most within six months and is wiped off your score completely in two years. Still, those planning on applying for a mortgage or car loan in the near future should proceed with caution.
The first tip for the opportunistic card holder is to take advantage of credit card sign-up bonuses. The largest incentives are offered within the first months of signing up for a credit card. Typical sign up bonuses can range from 25,000 to 100,000 points or frequent flyer miles. Oftentimes, in order to cash in on the sign-up bonus, the card holder is required to spend a minimum amount within a certain timeframe. For example, Chase Sapphire Preferred Card, one of the top-rated airline miles credit cards, offers a 40,000-point bonus for spending $3,000 in the first three months, which can be easily achieved through normal expenditures in most households. The 40,000 sign-up bonus points yield $500 for travel when you book through Chase, which can be applied towards airfare, hotel, car rentals and cruises. (Also bear in mind that many credit cards that charge annual fees will waive it for the first year.)
Since card bonuses are usually most attractive within the first year, a phenomenon called “credit card churning” has gained popularity. “Card Churners” refer to people who churn through credit card applications in order to maximize their rewards. They spend the minimum necessary to cash in on the bonus and then cancel the card a year later to avoid annual fees. For those without debt who pay their balance in full, credit card churning will not affect the credit score, as was explained earlier. In order to stay abreast of the most lucrative cards and latest bonus offers, Card Churners will frequent blogs, forums and websites that alert readers to new deals.
Some try to outsmart this system by returning purchases after cashing in on the sign-up bonus points, thereby receiving a sizable payoff of points without any outlay. As a result of this scheme, the credit card company loses its merchant fees that would have been collected on the minimum purchase requirement. The moral and halachic propriety of these “strategic” returns is questionable, and one should therefore consult a posekfor guidance.
Another way to increase your rewards is by taking advantageof authorized user bonuses. An authorized user is the term for someone who is permitted to use a credit card but is not responsible for paying the balance. Usually an authorized user will receive a card in their own name for making purchases, but the balance will be linked to the primary card holder’s account. Many credit cards offer special rewards for adding authorized users, and families with multiple users making purchases can easily capitalize on this benefit. Chase Sapphire Preferred, for example, pays 5,000 bonus points after the first authorized user makes a purchase within three months.
Strategic credit card users target their spending to maximize reward benefits. To review the basics, most credit cards award one point per dollar spent, and each point can be redeemed for 0.01 cents cash back (or 1 percent) and more lucrative rates if the points are redeemed for travel expenses. However, some cards also offer a higher rate on specific services or commodities, with deals rangingfrom double points to five times the amount of points for spending in a certain sector, such as gas, groceries, dining, or entertainment. On top of that, card holders can participate in both fixed and seasonal promotions when credit card companies partnerwith merchants to offer point incentives for spending in those stores.
In addition to granting points to cover travel expenses, credit cards offer many additional travel benefits for card holders. Even without rewards, using a benefit-rich credit card to pay for a flight can entitle card holders to luxury airport lounge access, lost baggage insurance, trip cancellation insurance, trip delay reimbursement, travel accident insurance, primary seating, free bag check-ins, and exemptions from foreign transaction fees. Some cards provide their own primary car insurance for rentals worldwide, which is advantageous because instead of paying out-of-pocket for minor rental car damage or using your standard car insurance, which will result in a higher monthly premium, the infraction is covered by the credit card. Some cards also provide a valuable return protection policy which allows card users to receive refunds for items within 90 days of purchase even when the store refuses the return.
As we know, credit card companies are not interested in giving away money, but once you learn to work the system to your advantage, the plastic in your wallet becomes your ticket around the world.