Miles and Points

An Introduction to Miles and Points

Airline and Hotel Loyalty Programs were created to encourage customers to travel more by offering certain perks for more business brought to the airline. The airlines and hotels know that many people travel for work and if they offer benefits for those traveling, they know that the employees will select one airline or hotel chain over another based on what they are offered. The airlines and hotel chains know that they can drive additional revenue by creating unique benefits for the customer as the companies will spend more with them. As business travelers gain status with airlines they come to expect benefits such as upgrades, free food or drinks as well as lounge access. In turn they direct more travel on that particular airline or hotel chain which brings more business and revenue to the airline or hotel chain.

The airlines and hotel chains offer miles and points as a way of rewarding customers for their continued loyalty. The points and miles have a value as they can be redeemed for flights, hotel stays or many other benefits.

The programs exist because they are revenue generating for the airlines and hotels. As more and more people use the programs that drives additional revenue for the companies. In addition, the vast majority of airlines and hotel programs partner with banks to issue credit cards that reward points and miles for everyday spending. The banks purchase the miles and points and reward customers for spending money on their card with those points. The banks earn money from each purchase from what is called merchant fees. Merchant fees are fees paid by businesses for accepting credit card payments.

Miles and Points are a Win-Win Solution:

Bank buys the miles and points at a low price and they reward the points to the customer. The bank wins because they are making more money on each transaction than what they pay for the miles or points that they are rewarding. The airlines and hotel chains win because the bank pays them for the points and miles. The customer also wins because they can build up large balances of points and miles and they can redeem them for travel experiences.

Options for Miles and Points Earning:

A consumer has various options for earning points or miles:

  1. Traveling on an airline or staying at a hotel and earning points or miles based on the distance traveled or dollars spend
  2. Earning bonus miles for travel by participating in promotions or elite benefits awarded for customer loyalty
  3. Earning miles on everyday purchasing using a credit card which offers direct points or miles to one particular airline or hotel chain (Airline or Hotel Co-Branded Credit Cards)
  4. Earning miles on everyday purchases using a credit card that offers points that are transferable to various airline and hotel partners

All of the above options earn miles, however, the bottom two are ways that miles and points can be earned quickly because the miles and points are earned on everyday purchases not just purchases of travel. In addition, the majority of credit card programs offer huge sign-up bonuses which award a large quantity of miles or points for charging so many dollars on a card over a short period of time. This is a great way of building up large balances of miles and points at one time.

Credit Cards – A Word of Caution

Points and miles earning from a credit card can be a tremendous value to the consumer so long as they are disciplined in making the purchases. The credit cards that offer miles and points have some of the highest interest rates out there and the miles and points earning only makes sense if the bill is paid off each month rather than keeping a balance on the card. The interest charged by the cards way outweigh the points and miles earned from the card.

Credit card earning of points and miles should only be done by people that view the purchases as cash and only charge what they can pay in a given period of time.

If you frequently keep a balance on your card, I would recommend NOT getting utilizing a credit card for points and miles as the interest charged on the card is significant and it way outweighs the benefits from the points and miles.

Credit Scores

Points and miles earning cards are considered premium credit cards by the banks and the credit requirements for being approved for the card is strict and is only an option for people with good credit.

Before applying for a credit card it is important to understand what is on your credit report and what makes up your credit score. Each year everyone is entitled to obtaining a copy of a free credit report and you should do it to review the information that is present on your card. The credit report can be obtained from annualcreditreport.com once every 12 months. This webpage will not give you your credit score, a number given to each person based on their overall credit and it is made up of a multitude of information. The credit card companies generally use FICO scores or some other commercial available credit scoring service. Free services such as Credit Sesame can provide you with an estimate of your score and I would highly recommend reviewing before applying for any credit cards.

Credit scores are made up of five components:

  1. Payment History – 35% – Your account payment information including any delinquencies and public records
  2. Amounts Owed – 30% – How much you owe on your accounts. The balances on credit cards or other revolving accounts is heavily weighted
  3. Length of Credit History – 15% – How long your accounts were opened and the time since activity occurred on your accounts
  4. Types of Credit Used – 10% – The level or mix of the accounts that you have open such as revolving or installment
  5. New Credit – 10% – Your pursuit of new credit including credit inquiries and number of recently opened accounts

As you can see the score is heavily waited on your payment history and amount owed. So if you have a balance on your credit cards your score is likely to be lower than someone that pays their balance each month. A greater percentage of available credit helps to have a high credit score.

What is a good credit score?

Credit scores range anywhere from 300 to 850. The higher the score, the better.

Experts will argue what a good credit score is. My thought is that any score above 750 is good.

So you have a good credit score and are disciplined to only charge what you can pay in a given month, now what?

If you have a good credit score and have the discipline to not use a card for things that you are unable to pay then a good place to start would be picking a card that the points are transferable to a variety of programs such as the American Express Card or the Chase Sapphire Preferred Credit Card.

I recommend a transferable point card because airlines and hotel chains from time to time may devalue the programs so it is better having point currency that can be transferred when you are ready to book.

The card you select should depend on your unique circumstance. Some people will apply to multiple cards at the same time, which can help to earn a lot of points so long as you can stay disciplined and meet the minimum spend requirements on the card in order to earn the bonus points. Keep in mind that each time you open a new card it will also impact your credit score but not as much as if you keep a balance on the account.

If your credit score is over 750 you should not have a problem getting approved for one of the transferable point credit cards. Once you have one of the cards, use that card to pay for as many of your monthly expenses as possible (again only charging what you can pay in the month) and or consider manufactured spend (where you buy gift debit cards using the points earning card and then either using the gift debit cards to pay for expenses or liquidating the funds via an alternative bank source such as Target Prepaid Redcard and paying the credit card bill with the funds).

I would recommend sticking to one card at first until you get the hand at things before branching out and adding more cards.

I personally use the Chase Sapphire Preferred card for the majority of my monthly purchases because they earn points that can be converted to several airline programs as well as hotels. Other experts love the American Express Starwood card because it has more airline transfer partners and the transfers are at 1 point to 1 mile and the transfers are instant.

I also carry a card with a high annual fee which also allows for lounge access on American Airlines and the most generous Priority Pass lounge program available at other lounges when I am not traveling on American, which is the Citi Prestige Card. This card has unique benefits such as the lounge access and the fourth night free promotion which credits back the fourth night of a hotel stay. If you travel often, I would highly recommend the Citi Prestige Card or the American Express Platinum card because it allows access to the highly regarded Centurion Clubs and Delta Skyclub.

Whatever card you choose, make sure that you a diligent with your credit and only charge what you can pay in a given month and work to keep at least 15-20% as available credit at all time on your card as that greatly impacts your credit score.
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