–Hey Taylor – My friends just got a Chase Ink Business card because there was a huge air miles sign-up bonus. Since nothing in life is actually free, I’m wondering how these airline credit programs work. Like, where’s the scam?
–Hey Jordan – “Nothing is actually free” is a great mindset to have when considering any sort of promotional deal. It doesn’t mean you’re somehow being tricked or robbed, but there has to be some way that the airline makes up the money on the back end. So, who comes out on top and how?
- Loyalty. When you sign up for a Delta or Southwest or American Airlines Visa and get a free flight out of it, that airline is trying to make you a repeat customer. So however much it costs to put you on a flight for free, they get that money back in future business (theoretically). If the plan works and the access to rewards makes you loyal to one particular airline, it’s worth offering the generous sign-up bonus. For most people, the loyalty programs have some effect—unless you’ve got billions of dollars to spend, it’s hard to make meaningful gains on more than one travel rewards card.
- The airline-credit card pipeline. While it’s the airlines looking to create loyalty, they aren’t the businesses footing the bill when customers get that great initial bonus. That cost falls to the credit cards, as Visa, Mastercard, and AMEX are the ones who really turn a profit when someone opens an account. Take the Delta Amex card as an example. Someone signs up for that card and gets a big Delta bonus. Meanwhile, Delta reported nearly $8 billion in revenue from AMEX last year, showing how much the creditors are willing to pay to get their cards in the hands of consumers. When you look at it from this angle, it’s clear that the reward points aren’t a scam at all; Delta will gladly hand over free flights in exchange for all the money they get from AMEX. Meanwhile, AMEX rakes in tons of cash on bank fees and interest payments.
- Ends justifying the means. To really answer your question, we have to consider the card and the individual using it. Your friend with the Ink Business card will earn a free flight, though I’m assuming they have to spend a certain amount in the first three months to get that bonus. Next, they have to keep spending to earn more points and cover the annual fee. Some people spend beyond their means to earn bonus miles, which isn’t financially savvy. Others don’t ever spend enough to accrue the miles needed to justify using a card with an annual payment. And then some of us spend enough and understand credit cards well enough to turn everyday expenses into free travel. And yes, I am including myself in that last category. Once you know how to play the game, I do believe it’s worth playing.
Airline mileage programs are not scams, you just need to understand how they work and find a card that actually makes sense for your lifestyle. Hope this helps!
TAYLOR J KOVAR
CHIEF EXECUTIVE OFFICER
CERTIFIED FINANCIAL PLANNER™