- Rewards credit cards aren’t for everyone.
- There are other ways to pay for travel, including debit cards, no-annual-fee credit cards and money transfer services.
- The government is concerned about rewards credit cards and will likely regulate them soon.
Ronald Duben is ready to give up his credit card. He thinks there’s something better out there – and almost certainly there is.
Duben has been dutifully shelling out $120 a year for his co-branded airline rewards card, which promises he’ll get “free” flights if he spends enough money. It was a good deal at first. After accumulating about 60,000 points by the end of February, he could redeem his rewards for a flight to Asia.
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But when Duben recently tried to redeem his loyalty points for an economy class ticket to Japan, he was surprised to see that his airline more than tripled the miles he had to pay. He then asked her for another $375 in taxes and fees on top of the 200,000 points.
So much for “free”.
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“I feel like I’m deeply involved in a fraud,” said Duben, a retired chef from San Rafael, Calif., “and I want out.”
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Making a U-turn on Rewards Credit Cards
Rewards credit cards — and especially those credit cards with high rates and earning high-interest miles — aren’t for everyone. You will likely pay an absurdly high interest rate and add $1 trillion in credit card debt, as well as get a “free” plane ticket.
The government is also concerned about these cards. Earlier this month, the Consumer Financial Protection Bureau (CFPB) released a report on rewards cards that identified several problems with these payment systems. Consumers have complained that rewards are often devalued or denied even after meeting program terms. And consumers who have revolving balances often pay more in interest and fees than they receive in rewards.
The CFPB and Department of Transportation also held a hearing on rewards credit cards, a likely precursor to regulation of these programs.
So if this is the beginning of the end for rewards credit cards, what’s next?
Here are alternatives to rewards cards
Read a travel blog or a newspaper’s travel section, or glance at a travel Instagram account, and you might think that the only way to travel is with one of those expensive travel cards. But there are other ways to pay:
▶ A debit card: A debit card or bank card deducts money directly from your bank account. There’s no need to worry about spending more than you have because this usually won’t allow you to overdraw. “Debit cards are a simple option,” said Shawn Plummer, financial expert and frequent traveler. “They are widely accepted and eliminate the risk of accumulating debt because they only allow you to spend what you have.”
Many debit cards still offer travel benefits, like no currency conversion fees, but there are limits: Car rental companies and hotels may not accept debit cards.
▶ A credit card with no annual fee and low interest rates: You shouldn’t pay an annual fee for your credit card. And if you do a little research, you might be able to find a card with an annual interest rate of less than 10%. Tip: Check with a credit union. Many of these cards also offer all the travel benefits you need, including coverage for car rentals and medical evacuations – and no exchange fees.
By the way, if you want to pay a membership fee, try joining one of the warehouse clubs like Sam’s or Costco. Peter Hoagland, a consultant from Warrenton, Virginia, relies on his Costco visa. He said it is a convenient payment system with relatively reasonable fees.
“I use the card everywhere,” Hoagland said.
▶ Money Transfer Services: A service like Revolut or Wise will allow you to transfer money to a business or individual, bypassing the credit card network completely. These companies are at the forefront of digital banking. I visited Wise headquarters while in London recently and loved their plan to remove “all friction” between you and your money. This means eliminating many of the high fees you’ve been paying for years.
Las Vegas communications consultant Andy Abramson uses both and likes the transfer speed and favorable exchange rates when transferring dollars into another currency.
“They’re both amazing,” he said.
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What is the future of payment systems for travelers?
Are rewards credit cards obsolete? Have they become bloated and inefficient, with their high theft rates and exorbitant interest rates and empty promises of free tickets? Some industry observers believe the answer is yes.
As an intermediate step, many travelers are switching to a debit card or digital payment system. This allows them to lower their interest rates and make smarter decisions about their purchases, rather than carelessly spending money to accumulate points or give all of their loyalty to one airline.
Financial experts see a better future just ahead. It’s a place where peer-to-peer digital payment systems are used to transfer money at virtually no cost to you. In that future, cards will be as old-fashioned as traveler’s checks. All transactions happen on a phone with one tap and a biometric “OK”. And loyalty programs have evolved into something more sophisticated than today’s bait-and-switch cards that just make you spend more.
Will the government regulate rewards credit cards?
Following this month’s joint hearings with the CFPB and DOT, rewards credit cards will likely be regulated soon.
Even if regulators don’t act, Congress could. A new bill called the Credit Card Competition Act could bring much-needed competition to credit cards. This would make rewards cards a little less generous and could bring some sobriety back to rewards programs.
It was about time. Rewards credit cards make promises they can’t keep, trick you into spending more than you should, and ultimately only reward the airlines and credit card companies that issue trillions of often useless points. The sooner we find an alternative to rewarding credit cards, the better. The current system is completely unsustainable.
That’s what Duben, the retired chef who wanted to go to Japan, did. He clicked on the United Airlines website and booked a regular ticket. He will use his miles for another ticket and then close his rewards credit card for good.
Christopher Elliott is an author, consumer advocate and journalist. He founded Elliott Advocacy, a nonprofit organization that helps solve consumer problems. He publishes Elliott Confidential, a travel newsletter, and the Elliott Report, a customer service news site. If you need help with a consumer issue, you can contact him here or email chris@elliott.org.
