2010 Credit Card Smackdown: Cash Back vs. Airline Rewards

Airline reward credit cards may lure you in with promises of big bonuses and double miles, but savvy consumers know to look for the fine print. In many cases, you might reap more benefits by trading your airline reward credit card for a cash back credit card.

Sky-High Annual Fees on Many Airline Credit Cards

Airlines and credit card issuers took a beating during the recent recession, forcing both industries to cut costs. Banks compensated for fading profits by bumping up annual fees, especially on reward cards. In fact, affinity credit cards tied to specific airlines charge some of the steepest fees.

On the other hand, many of the best cash back credit cards carry no annual fees. Card issuers fund rebates from the interchange fees charged to merchants on every transaction. Sharing a percentage of those fees in the form of an annual cash rebate allows lenders to encourage more frequent transactions while earning interest from deferred reward payments.

Cash and Deals Trump Credit Card Fees and Frequent Flyer Points

Fierce competition from upstart carriers like Southwest, AirTran, and JetBlue has upended the travel business, casting a shadow on traditional frequent flyer programs. Not only have most mainstream carriers reduced the number of reward seats available on each flight, they've instituted redemption fees while requiring travelers to cover the costs of airport surcharges and other taxes for every reward ticket. Worst of all, cash-strapped airlines have become notorious for "bumping" reward travelers in favor of seating full-fare business customers.

A typical airline frequent flyer program offers "super saver" frequent flyer seats for 25,000 miles. Under typical usage, it might require $25,000 in purchases to earn enough miles to qualify for that fare. Factor in a $95 annual fee and a $75 redemption fee, plus another $25 for taxes, and your "free" flight now costs $195. Amazingly, a discount travel search engine like Kayak.com might find the same flight on sale for $300. Make the same annual purchases on a 1% cash back credit card, and your net cost drops to just $50 while expanding your travel options to include multiple carriers.

You don't have to stop there, however. Taking advantage of card issuers' bonus rebate promotions can eliminate your net cost, or even generate a little cash for souvenirs.

Airline Loyalty Credit Cards Still Win for Certain Travelers

Even though most consumers will enjoy better overall deals from cash back credit cards, airline cards still shine in a few specific cases:

  • Airlines have become desperate to build customer loyalty, often offering enough bonus miles to earn a discounted award with an initial purchase. Choose a card with a waived first year fee, and you can defer the net cost of your trip until the start of your second year with that card.
  • Frequent travelers often earn double or triple miles when purchasing airfares on an affinity credit card.
  • Some airlines now allow cardholders bonus privileges, such as free or discounted airport lounge access or early boarding.
  • As carriers pull out of some airports to cut budgets, fares rise. Certain cities may be less expensive to reach using frequent flyer miles instead of discount airfares.
  • Carefully monitoring airlines' frequent flyer booking sites can reveal last minute seats that would cost over $1,000 when paid for with cash.

Choosing a cash back credit card or an airline credit card really depends on how you like to travel and how you like to organize your daily expenses. You can find a comprehensive list of airline reward cards and cash back cards, including reviews, by visiting the "Card Cards" section of our website.