Reward credit cards aren't for everyone. There are other ways to pay for travel, including debit cards, credit cards with no annual fee, and money transfer services. The government is concerned about reward credit cards and is likely to regulate them soon.
Ronald Duben is ready to give up his credit cards because he thinks there has to be something better out there. And he's probably right.
Duben has been dutifully paying $120 each year into an airline-affiliated rewards card that promises “free” flights if you spend enough money. At first, it was a good deal: By late February, he had accumulated about 60,000 points, which he was able to use to buy 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 find that the airline had more than tripled the number of miles he owed — and wanted 200,000 points, plus an additional $375 in taxes and fees.
“Free” is just that.
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“I feel like I'm deep in a scam,” said Duben, a former chef from San Rafael, Calif. “I want to get out.”
Apparently there is a loophole.
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Reward credit cards are changing course
Points-earning credit cards, especially frequent flyer credit cards with high fees and interest rates, aren’t for everyone. You’re probably just as likely to pay ridiculously high interest rates and add $1 trillion to your credit card debt as you are to 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, finding multiple problems with these payment systems. Consumers complain that their points often depreciate or are rejected even after they meet the program's requirements. And consumers with revolving balances often end up paying more in interest and fees than they're earning on the points.
The CFPB and Department of Transportation also held hearings on rewards credit cards, which are likely a precursor to regulating these programs.
If this is the beginning of the end for rewards credit cards, what's next?
Rewards Card Alternatives Here
If you read travel blogs, newspaper travel sections or look at travel-related Instagram accounts, you might get the impression that the only way to travel is with a travel card that comes with high fees. But there are other ways to pay.
▶ Debit cards: A debit card, or bank card, takes money directly from your bank account. It usually doesn't leave you with a low balance, so you don't have to worry about spending more than you have. “Debit cards are an obvious choice,” says financial expert and frequent traveler Shawn Plummer. “They're widely accepted, and you can only spend what you have, so there's no risk of piling up debt.”
Many debit cards also offer travel perks, such as no currency exchange fees, but they also have limitations: Rental car companies and hotels may not accept debit cards.
▶ No annual fee, low interest credit cards: You don't have to pay annual fees on credit cards. With a little research, you can find cards with an APR of less than 10%. Tip: Ask your credit union. Many of these cards come with all the perks you need for travel, like car rental and medical evacuation coverage, and they don't charge currency exchange fees.
By the way, if you want to pay membership fees, try joining a warehouse club like Sam's or Costco. Peter Hoagland, a consultant in Warrenton, Virginia, praises the Costco Visa, which he says has relatively reasonable fees and a streamlined payment system.
“I use it everywhere,” Hoagland said.
▶ Money transfer services: Services like Revolut and Wise let you send money to businesses and individuals, bypassing credit card networks entirely. These companies are at the cutting edge of digital banking. I visited Wise's headquarters on a recent trip to London and was very impressed with the company's plans to remove “all friction” between you and your money. This means eliminating many of the high fees you've been paying for years.
Andy Abramson, a communications consultant in Las Vegas, uses both and likes the speed of transfers and the favorable exchange rates he gets when moving dollars into other currencies.
“They're both great,” he said.
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What does the future hold for traveller payment systems?
Are rewards credit cards outdated? Bloated and inefficient, with expensive swipe fees, exorbitant interest rates and empty promises of free tickets? Some industry watchers think the answer is yes.
As an intermediate step, many travelers are switching to debit cards and digital payment systems, which allow them to lower interest rates and make smarter purchasing decisions instead of mindlessly spending money to accumulate points or committing loyalty to one airline.
Financial experts see a better future just around the corner, one where money can be sent for virtually free, using digital, peer-to-peer payment systems. In that future, cards are as obsolete as travelers' checks, every transaction requires a simple tap on your phone and a biometric “OK.” And rewards programs have evolved into something more sophisticated than today's bait-and-switch cards that simply encourage more spending.
Will the government regulate rewards credit cards?
Following a joint hearing with the CFPB and DOT this month, rewards-awarding credit cards will likely be regulated soon.
Even if regulators don't act, Congress can. A new bill called the Credit Card Competition Act could bring some much-needed competition to credit cards, potentially making rewards cards a little less persuasive and bringing some moderation back into rewards programs.
It's about time. Points credit cards make promises they can't keep, lure you into spending more than you should, and ultimately reward only the airlines and the credit card companies that issue trillions of worthless points. The sooner an alternative to points credit cards is found, the better. The current system is completely unsustainable.
That's exactly what Duben, a retired chef who wanted to go to Japan, did: He clicked through to the United Airlines website and booked a regular flight. He plans to use his miles to buy another ticket and then cancel the rewards card altogether.
Christopher Elliott is an author, consumer advocate and journalist. He founded the nonprofit Elliott Advocacy to help solve consumer issues. He publishes the travel newsletter Elliott Confidential and the customer service news site Elliott Report. If you need help with a consumer issue, contact him here or email him at chris@elliott.org.
