Friends fighting to charge the restaurant meal--hoping to get extra airline miles--illustrate the marketing power of credit cards linked to frequent-flier programs.
These cards represent about 1.5% of the credit cards in circulation, but they handle 3% to 4% of charging volume, and the cardholders are some of the best risks in the business.
Thus, airline mileage is driving much of the credit card market, said Ruth Susswein of Bankcard Holders of America, a Virginia-based nonprofit consumer group that tracks the credit card industry.
The cards are a part of the strategic arsenal frequent fliers use to keep their travel costs down. Fervent frequent fliers are charging automobile purchases, postage, groceries--even their taxes--in order to maximize their miles.
Offering a card that gives miles is becoming a sure way to win wallet share in consumer pockets already crammed with plastic.
Delta Air Lines, for example, recently launched a co-branded credit card with American Express, offering a 5,000-mile enrollment bonus and a 50% bonus for buying Delta tickets on the card.
Entry into the revolving-credit market is highly competitive right now, said Rob Rosenblatt, vice president of co-branding at American Express. “It requires a very high value of rewards. We wanted a powerful incentive, so we chose airline miles.”
American Express, already dominant in the pay-in-full charge card marketplace, is moving into revolving credit through co-branded cards. It already has co-branded cards with Delta and Hilton Hotels and is in discussion with other travel-related companies, Rosenblatt said.
In the four months since the Delta Skymiles American Express card was introduced, it has picked up about 400,000 accounts, according to RAM Research, a Frederick, Md.-based company that tracks credit card accounts.
Frequent-flier cardholders are not like other cardholders. They charge more and pay their balances off more religiously.
“About 64% of typical cardholders carry a balance forward each month,” said Robert McKinley, president of RAM Research. “With these programs, you’re lucky to get 50% to carry balances.” That may mean less interest income for the card companies and banks, but the cards often have hefty fees, and the charging volume helps because of merchant fees.
Fees for such cards range between $25 and $60 a year, and interest rates average 18%.
“There are not that many [frequent-flier] cards compared with the overall market,” said Jim Shanahan, partner with Business Dynamics, a Nyack, N.Y.-based credit industry consulting firm. “But the people that have these cards really love them.”
With 2.7 million holders between them, the cards of American and United rank among the 10 largest co-branded cards in the country, McKinley said. And they are growing at a 20% to 25% clip, more than double the rate of cardholders overall.
Using credit cards is the No. 1 way to earn miles without flying, said Randy Petersen, publisher of InsideFlyer, a Colorado-based publication that tracks frequent-flier mileage programs. Credit cards now account for about 40 billion miles, or between 60% and 65% of all miles earned without flying, he said.
The next-largest category is long-distance calling for miles, which accounts for about 25% of all nonflying miles earned. Flying itself still produces the greatest number of frequent-flier miles, accounting for between 60% and 75% of the nearly 200 billion miles earned each year.
With Delta on board, all the major airlines now have affinity cards, Petersen said. Even smaller airlines, including Midwest Express and little “Bee-Wee” (British West Indies Airlines) have joined the club.
The cards are so popular that many of the airlines have had to put restrictions on the number of miles you can earn on them, Petersen said--often 60,000 a year. In addition, you usually can’t earn miles for cash advances or balance transfers from other cards.
The fees are steep, “but that investment is the most valuable you will ever make toward free travel,” Petersen said.
Caveats still apply. You shouldn’t charge what you can’t afford. “The success of using an affinity credit card depends on the proper use of credit versus the proper use of cash,” Petersen said. It requires the discipline to pay the whole bill off each month.
You can’t let miles drive your purchase, Petersen said. “But if it’s a purchase you would make anyway and you can get miles for doing it without paying the penalty of interest, then why not?”
Overall, the cards don’t make sense if you can’t charge enough volume to earn free tickets. If you only charge between $2,600 and $3,000 a year, it will take about eight years to get a free ticket because, in many cases, your miles start expiring along the way, McKinley said.
And consumers should weigh miles against other cards that earn points, discounts or, in the case of the Discover Card, cash.
To aid consumers in doing a cost-benefit analysis of frequent-flier mileage cards, Bankcard Holders of America publishes a “Rebate Frequent Flyer Cost Benefit Guide.” (To order, send a check for $5 to Bankcard Holders, 524 Branch Drive, Salem, VA 24153.)
The guide calculates one year’s worth of interest, adds the membership fee and tells you how many miles you would earn if you were a “typical” cardholder charging $2,800 annually and carrying a balance of $1,950, or if you are a high-volume spender charging $25,000 a year and carrying a balance of $12,000.
It’s important to keep miles in perspective, credit advisors say. For many frequent travelers, earning miles becomes a kind of game or competition.
“It’s like an addiction,” Shanahan said. “In the co-branding industry, they’re called gamers.”
“I’m surprised so many people love them,” he said. If you charge $25,000 to get 25,000 miles for one free round-trip ticket, and if you consider the average cost of a round-trip domestic ticket is about $272, then the value of the ticket is only about 1% of your spending, he said. But other observers would value such a ticket at $400 or $500--it depends on how you use it.
Chances are you can find a cheaper credit card with a better rate that also offers a cash rebate. Then you can take the cash and buy the ticket or spend it on something else, Shanahan said. “It’s a classic example of a promotion where the sizzle is more important than the steak.”
Carol Smith is a freelance writer based in Seattle. If you have experiences to share or suggestions for Executive Travel, please write Executive Travel Editor, Business Editorial, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053; fax (213) 237-7837; or e-mail to firstname.lastname@example.org
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Airline Mileage Cards
Most airlines have linked their frequent-flier programs with credit cards that allow customers to earn points on the ground. American Express and Diners Club also have mileage programs linked with several airline plans. Major airline cards:
Program/Phone No. APR Annual fee Sample annual cost Alaska Mileage Plan Visa/MC x17.90% $45 NA (800) 552-7302 American AAdvantage Visa/MC v17.65 50 $394 (800) FLY-4444 American West Visa v18.15 35 354 (800) 243-7762 British Airways Visa v18.65 50 424 (800) 577-0633 Continental OnePass MC v19.65 55 443 (800) 850-3144 Continental OnePass Visa x16.50 45 NA (800) 543-1597 Delta Skymiles/Optima v17.00 55 314 (800) 635-5955 Northwest WorldPerks Visa v18.00 55 406 (800) 360-2900 TWA Visa/MasterCard v17.15 50 NA (800) EAB-TWA1 U.S. Air Visa v18.15 35 389 (800) 282-2273 United Mileage Plus Visa/MC v18.15 60 414 (800) 247-3927
Notes: Cost, calculated by CardTrak of America, is based on annual charge volume of $2,800 and a $1,950 continuing balance. Some cards have lower initial rates. APR--annual percentage rate; x--fixed rate; v-variable rate; NA--not available
Source: CardTrak of America