Airfare credit card for newbies

  A friend of mine asked me recently, "What's the best credit card for airfare?" I don't think I answered that question as good as I wish so let me try to answer that question here and now.

  Before this post turns into a giant long analysis filled with scenarios after scenarios, let me give out the short answer: it depends; but it may not be a bad idea to start with something that brings you the most cash back (or gift cards that can be liquidated quickly).

  And here is the long answer.

  Redefine the question
  
  Asking "What credit card is the best" is not necessary the best approach; the best one may not be the one that meets your spending habit (e.g. why bother collecting airline miles when you are only traveling once a year? you might be better off with cash back). Therefore, the question should be "which credit card I should put my airfare spending on?"

  Know yourself

  It's best if you know your spending habit and budgets before you start looking into which credit card you're gonna get to put your airfare on, period. I know it's tedious and painful, but at the very least, you should know how much you'd be expected to spend on airfare each year. The reason is simple: this way we can calculate a break even point if you should pay an annual fee easily.

  Optional: If you can keep track of your spending habits, I'd recommend identifying categories that you'd spend more than $3k a year. Why? Many credit cards out there carries annual fees about $100; 5% of $3k is $150, subtract the opportunity cost of $3k * 2% (standard cash back rate from no-fee credit card), the result is $90, which is close enough to the break even point for me. Therefore, if you can find a 5%  cash back card for that category, you should at least consider it (whether you should get it or not is a story for another day).

  After accounting, you need to ask yourself, "what do I want in return?" Everyone is different and there is really no right answer. Some people are strictly logical and wants whatever that offers best net present value (NPV); some just wants cash (or equivalent gift card that can be liquidated quickly); some wants to use that for air ticket or hotels; and still some others wants status recognition (perk).

As the title suggests, I expect my audience to be newbies; so let's start with something everyone can appreciate and value equally pretty easily: Cash and its equivalent gift card. And by the way, I'm going to assume that traveling in economy class is almost always preferred (i.e. the perks of business class such as lounge access, priority boarding, extra luggage, premium meal, extra leg-room do not outweigh the cost saving, whether in terms of points redemption or price paid for ticket).

Some popular cards to know

Let's start by identifying some cards to consider. To simply things for the newbies, let's start with something small. Therefore, I'm only identifying some (not all) cards that carries fairly low annual fee and above 2% return. Please note I'm generally not accounting for the sign up bonus as sign up bonus vary all the time and it would just make the calculation too complicated.

1. Penfed Premium Travel Rewards Amex

  This card offers pretty good straight up gift-card exchange for your points. As the link says, the card gives 5 points for airfare purchases; note that most gift card (including Amazon gift card) redemption rate is at 5880 points for $50 face value (as of 08/10/2015); which means you are getting about 4.25% cash back before accounting opportunity cost. At 5% opportunity cost, you're looking at roughly 4% cash back on air fare. This is not too bad and pretty straight forward IF you can accumulate fast enough (before Penfed devalue their program) AND liquidate these gift card fast. Currently popular gift cards being offered includes Amazon, Applebee, Banana Republic, Old Navy, Bed Bath & Beyond, Starbucks, Lowe's, Staples, iTune, Gap, Sports Authority, Sephora, IHOP, Morton's, Neiman Marcus, Outback, Panera, Flemings, to name a few. And lastly, there is no annual fee.

  The major downside of this card is that there is little or no reason to charge anything else on this card other than airfare (1 point every thing else which is equivalent of roughly 0.8% cash back) so you have to calculate how long would it take for you to hit that 5880 points sweet spot.

  One last thing is that you must be a member first to apply (min $5 a share); if  you are not readily qualify to join (pretty much being military), you can join the union by making contribution to one of the charities linked on the website to join. However, I've heard that they are not the type of people who just grant every applicant a credit card. So if you don't get qualified, build up your credit and revisit this card later.


2. AAA Rewards Visa 

  The AAA rewards visa offers 3 points per dollar on "travel purchases" which would include airfare; what makes it better is that if you happen to have preferred rewards status with Bank of America (i.e. having minimum amount of asset in BoA), you can get 10% - 75% extra bonus, which translates into 3.3% - 5.25% cash back. No annual fee either so when you're starting, this may be a good place to start.

  Similarly, other than travel, it offers few incentive to charge your normal spending on this card.

3. Citi Thankyou Premier

  This card, unlike the previous cards, carries an annual fee of $95, but is waived for first year. As of now, the sign up bonus is pretty sizable and it does seems like a good card with 3 points on travel (which surprisingly includes gas, tolls, taxi, parking, etc). Keep in mind the special definition of "travel" for this card is not the same for other cards, even other cards offered by Citi Bank. Also for this card, when redeeming airfare, hotel, cruises and car rentals through Citi's travel center, each point is worth 1.25 cents so you'd essentially be getting 3.75% back for this card. By the way, from my experience, redeeming airfare is probably the best option through Citi's travel center.

  One other thing about this card is that it uses the Thankyou point system, which means if you have other cards using Thankyou point system that offers better redemption option, the better one will take over. Or if  the other card has less favorable redemption option, that other card can take advantage of this card's rewards program by merging the two Thankyou points account. Just remember that you'll only have limited time to burn all the remaining points when you close the account.

4. Chase Sapphire Preferred

  This card would carry annual fee of $95 though it is usually (if not always) waived first year. This is one of those cards most other travel blog love to advertise. On the surface, it seems that it is merely a 2 points per dollar on travel and dining, which would translate into 2% or 2.5% (accounting 20% off travel when redeeming through ultimate rewards). So it seems that this is just a "good" card because of the sizable sign-up bonus

  The beauty of this card, however, is in that it offers 1:1 points transfer to many frequent miler programs, including some airline programs. This is where things getting interesting, as it is very dynamic to account the value of "airline miles". I've seen people valuing miles anywhere ranging from 1.2 - 2.2 cents per mile so potentially this would be 4.4% cash back for some people.

  At the end of the day, this is at least a decent starter card for people who are new to the game of collecting miles because of the sign-up bonus and low entry cost (waived annual fee). And if things don't go as planned (e.g. somehow you find that the mile collecting game is not for you), you can always take the cash back and leave.

5. Airline Miles card

  Almost every airline offers some type of credit card which offers various points for purchasing tickets on their website. Value on these points varies and differ from person to person (again, usually ranging from 1.2 - 2.2 cents per mile). What makes things more complicated is that these cards often offers some sort of perks that can not be easily converted to dollar value (e.g. luggage fees, priority boarding, opportunity to upgrade, annual companion pass, etc). These cards usually comes with increased sign-up bonus every once in a while so I'd recommend reading analysis on each card when these increased offers comes up because that's also when every other blogger will try to write about them. One last thing, though, is that keep in mind that there is often no reason to redeem these points toward things other than ticket so it's best to have an estimation on how soon you can accumulate and burn these miles before they get devalued.

6. Citi Double cash mastercard

  This card is the reason I've been using 2% as the benchmark. This is a no frill 2% cash back card that carries no annual fee. Note that this is NOT in the thankyou point system so there is no way to achieve higher than 2% with this card.

Conclusion
 The above list is not intended to be exhaustive but it should be a good place for anyone to start. At the end of the day, calculate the effective cash back rate, identify the sweet spot for reward redemption; then use your estimated spending habit to gauge how soon you can realize these rewards and if it'll be worth it for you.