Drawbacks Of Travel Reward Programs

By Glenn Curtis AAA

We've all gotten letters in the mail touting some new travel rewards program. Sometimes they come from a credit card company or directly from a major airline. But are these reward programs truly rewarding? Read on to find out.

The Program
Travel reward programs are often referred to as a loyalty rewards program, and they are generally a campaign devised to generate repeat customers for a particular company by offering a point gratification system for the customers' business. They are also meant to provide customers with a "thank you" for their loyalty to a company's product or service. That benefit is typically some sort of discount on certain items or services.

Some credit cards offer travel rewards as a means of thanking their existing customers and attracting new consumers to their card. For example, MasterCard (NYSE:MA) offers a card that grants travel "miles" for each dollar the consumer charges. After the consumer earns a certain number of miles, he or she can redeem them for travel with major airlines or stays at major hotels. Visa (NYSE:V) and American Express (NYSE:AXP) have similar offerings.

Hotel chains love loyalty programs as well because it's a great way for them to generate repeat business. For example, Hilton offers its "HHonors program", which allows consumers to earn travel points toward hotel stays or airline travel. One additional benefit of this program is that points can be transferred to family members who are part of the program. Similarly, Marriott offers Marriott Rewards, which allows consumers to rack up and redeem points at a variety of destinations around the world.

Airlines also use loyalty rewards programs as a means of getting a wing up on the competition. For example, American Airlines offers its AAdvantage frequent flyer program, Delta (NYSE:DAL) has SkyMiles, Continental Airlines (NYSE:CAL) has OnePass, and United Airlines (Nasdaq:UAUA) has Mileage Plus. In fact, virtually every airline has a loyalty program, each with its own system for granting and redeeming points and rewards. (To read about airline stocks, read Is That Airline Ready For Liftoff?)

Other types of companies have begun to get in on the action as well. For example, Carnival Cruise Lines (NYSE:CCL) has a SeaMiles program, and Royal Caribbean (NYSE:RCL) offers the Crown & Anchor Society. Even Amtrak has a rewards program.

Travel Rewards Program Benefits
In many cases, travel rewards programs allow members to accumulate points and redeem them for flights, cruises or hotel rooms. In some cases, points may also be redeemed for items like movies, clothes or gas from certain vendors.

Travel rewards programs can be a great way to "save" for that big trip. Participation in the programs may take some of the thinking out of socking away the money needed to fund a trip, because rewards points can be redeemed to cover many trip costs. Racking up travel rewards points may also be a better way to pay for a trip than charging it to a credit card and racking up interest. (To get the most out of your vacation, see Travel Tips For Keeping You And Your Money Safe and Ensure Your Vacation is Insured.)

Drawbacks
Consumers should be aware that some travel rewards credit cards may charge an annual fee. That fee may essentially offset the value of the rewards earned. It's also a burden that might not be necessary because there are other travel rewards cards out there that don't charge an annual fee. Before signing up, consumers should consider whether the fee is worthwhile compared to the number of points they anticipate earning and compared to competitors' offerings. (For related reading, see Six Major Credit Card Mistakes.)

Also, while some travel rewards users are particularly adept at charging all of their expenses to a credit card that offers travel reward points and then paying the full balance each month, for those who are prone to overspend, relying on a travel rewards card to pay for daily expenses could put them into debt. If this occurs, interest charges on the card are likely to outweigh any travel points earned. (To learn more, read Understanding Credit Card Interest.)

The next big problem with rewards programs is that consumers sometimes have difficulty redeeming points. The airline industry has "blackout dates", which means that on certain days, flights do not offer any seats to rewards program members. Hotels and cruise lines have blackout dates as well. The difficulty consumers sometimes encounter in redeeming points is outlined in a 2006 survey by GMAC Mortgage. The survey found that while
more than 50% of respondents in a national survey of American consumers reported having at least one or two rewards credit cards, more than 41% of these cardholders either rarely or never used their rewards. If these consumers are racking up interest charges as well, it's clear that these reward cards hold little benefit - particularly if these cards have annual fees and/or higher interest rates.

Yet another big problem with redeeming travel rewards points or miles is that individuals rarely travel alone. They often like to travel with a friend or family member, and trying to get that person on the same flight or in the same hotel at an advantageous rate can be a challenge.

Finally, some people use these cards with only the reward in mind and not the costs that they have to rack up to earn that reward. If a consumer is racking up huge bills, breaking their budget or paying finance costs on a credit card in the pursuit of earning travel rewards, they probably won't come out ahead.

Finding the Best Programs
Research is the key to finding the best travel rewards programs. One tip is to call these companies directly and speak with a representative to find out about their rewards programs. The alternative is to review the websites of the major hotels, airlines, cruise lines and other travel-related companies. In addition, Inside Flyer, a magazine devoted to covering the latest news on travel rewards programs, is an excellent source of information.

Finally, try to gravitate toward a program with rewards you might actually use. For example, if you drive a great deal when you travel, lean toward rewards programs tied to gas stations. If you frequently fly on a particular airline, signing up for that airline's credit card and loyalty program probably makes sense, especially if the credit card has no annual fee.

Bottom Line
Travel rewards programs can be great for both the company offering them and the consumer enrolled in them as long as the consumer participates in the program wisely.

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