The best reward card for travel is not what you think
There is a dirty little secret in the world of Mileage Reward Cards. It’s a secret no one else will tell you. In fact, most mile-hoarding travelers don’t even know.
Those miles you’re accumulating on your reward card. They’re not free!
You’d never know that listening to the countless travelers who brag about the “free” flights they get courtesy of their mileage cards. But it’s true. You pay a large price for using a mileage card. I’m not even talking about the annual fee most travel cards now charge.
This dirty secret holds true even for efficient card users who avoid interest charges and late fees by paying off their balance each month. (Anyone who pays credit card interest should strongly consider cutting up their cards regardless of any reward program, but that is a topic for an entirely different blog post).
No, the secret isn’t about how the cards are used (with one exception we’ll address later). It’s about the fact that those travel rewards are earned at the expense of more valuable credit card perks; chiefly cash.
The best credit card for travelers is the one that gets you the most travel, not the most “miles.” Everyone should clearly prefer a card that gives you $600 in cash to one that gives you an airline ticket worth $500.
Loyalty programs try desperately to confuse that simple value proposition, and they do so for a reason. Awarding “miles” allows them to bestow psychic rewards in lieu of actual cash. You feel good about earning 1,000 miles, even though you have only the vaguest idea of what those miles are worth. Similarly, you choose travel reward cards to earn a mile or two for every dollar you spend without knowing whether those miles are more valuable than the cash rebates you could have earned by using other cards. That confusion allows mileage cards to offer less value, and they do.
We recently did the math and determined that the best cash-back cards pay at least 45% better than the best pure mileage cards.
For example, we estimate that someone charging $12,000 annually on United’s MileagePlus card will earn miles redeemable for only about $70 worth of travel after deducting the card’s annual fee. Meanwhile, the same spending earns $226 in cash rewards on the Chase Freedom Card. British Airway’s Signature Card doesn’t even earn back it’s annual fee at that level of spending.
The closest competition comes from Capital One’s Venture Card. Although it’s billed as a mileage card, Venture really works more like a cash reward card. Cardholders earn 2 “miles” for every dollar purchased and each mile can be redeemed for $0.01 worth of airfare or an equivalent amount of cash. It’s basically offering 2% cash rewards on all purchases, which is about the best reward we’ve been able to find. The only thing that prevents Venture from beating the Freedom Card is Venture’s $59 annual fee.
If it sounds too good to be true
Surprisingly, the least generous card we investigated was one that initially appeared to offer the best benefits.
The British Airways Signature Card not only awards a signing bonus of up to 100,000 miles (enough for two round trip tickets from the U.S. to Europe) but also an annual companion travel voucher once the cardholder charges $30,000. At first glance, it seemed as if high spending cardholders could earn travel rewards approaching 4% of their purchases. That trounces the meager 1.88% we’re earning with our cash-back Freedom card.
It sounded too good to be true. And indeed it was.
This disclosure buried deep in the fine print essentially moved Signature from first to worst in our credit card smackdown:
At time of publication all reward flights and travel together tickets are subject to fuel surcharges, taxes & fees of approximately $650 per person in economy or $1,100 in business class based on travel from New York to London.
Those massive surcharges applied to mileage redemption significantly reduce the value of the rewards. So much so that most cardholders will not generate enough rewards to earn back the card’s annual fee. Even high-spending folks who qualify for a companion ticket voucher barely come out ahead. We estimate that someone who charged $32,000 to their Signature card in a single year would only realize a net fare discount of about $130 on two round-trip flights to Europe.
You can do better than that with nearly any cash back card. And with a cash reward card, if you choose not to fly you still have the cash in your bank account instead of being in the hole for Signature’s $95 annual fee.
Which is the “Best” Travel Rewards Card?
Which card is best is a moving target, and depends on how the owner uses it. But based on our analysis, no-fee cards offering 2% cash back should easily beat dedicated mileage cards for normal usage. The complex reward formula for the Feedom Card nets us close to 2%, although other owners may experience better or worse results. So your “mileage” may vary with this card.
Another good option for people with Fidelity brokerage accounts is Fidelity’s no-fee 2% American Express card. Capital One’s Venture card is advertised as a mileage card, but is really a 2% cash back card in drag. And while its $59 annual fee makes it a worse option in our opinion than either the Freedom or Fidelity cards, it is still a better choice than the other mileage reward cards.
Pentagon Federal’s Platinum Cash Reward card deserves a special mention. This card gives a whopping 5% cash back on gasoline purchases. For gas-guzzling RVers like us, that adds up to serious mullah over the course of a year. We only use the card for gasoline purchases and our Freedom card for everything else. That pushes our total rewards well above 2% and significantly pads our cash-back lead over the mileage card pretenders.
A Note on “Travel Hacking”
Travel hacking is a phrase used to describe the practice of exploiting travel reward programs for maximum gain. Travel hacking is to rewards programs what couponing is to groceries. And like couponing, travel hacking has some hardcore advocates who claim miraculous savings. Savings that most of us mere mortals would struggle mightily to duplicate, but are theoretically possible nonetheless.
One common travel hacking strategy is to apply for cards offering generous signing bonuses and then cancel the cards after miles are awarded. While we understand that this can be a lucrative technique, our analysis focuses only on the recurring benefits of the four cards in question. We don’t attempt to address the value of gaming promotional bonuses.
United’s MileagePlus card, for example, offers 25,000 miles upon acceptance and 5,000 additional miles for adding a second card user. We value those 30,000 miles to be worth approximately $400, a tidy sum for just opening the account. In comparison, the Chase Freedom card only offers $100 in cash to sign.
For travel hackers who intend to close the account promptly, United’s more generous signing bonus makes its card the better option. But for normal users who plan to keep the account open, United’s $95 annual fee and lower payout on purchases will eventually overwhelm the better signing bonus.