Mellody's Math: Frequent Flier Benefits
April 5, 2005 — -- If you are like most people, your frequent flier mileage and other affinity reward balances are likely on the rise. In fact, according to InsideFlyer.com, there are over 7.8 trillion miles in current liability among all frequent flier programs. If you are having a difficult time planning a vacation with those miles or unsure how to spend your reward points, there are options besides letting them go unused.
According to Frequentflier.com, members of frequent-traveler programs with airlines, hotels, credit card companies and other affinity programs earn more than 650 billion miles and points annually. However, approximately 75 percent of the rewards are never redeemed! As such, similar to balancing your checkbook every month, make sure to open all of your reward statements and verify the point balance at least twice a year. Keep in mind, sometimes these points expire, so keeping a careful watch is a must.
While frequent flier miles are not worth much in terms of real dollars, they still represent a monetary value greater than many countries' currencies. Companies, such as credit card issuers, can purchase miles from airlines for 1 cent to 2.5 cents a mile. Frequent fliers can purchase miles from many airlines as long as they are members of their mileage programs. United Airlines, for example, allows its Mileage Plus members to purchase up to 25,000 Mileage Plus miles per calendar year for $696.88, which includes applicable taxes and a $25 per transaction processing fee. That comes out to about 2.8 cents per mile.
To figure out how much a mile is worth, divide the ticket fare by the number of miles you would need to accumulate to earn a free ticket. If you use 25,000 miles for a domestic ticket that costs $250, it would be the equivalent of spending $700 (25,000 miles divided by 2.8 cents per mile). Therefore, you would be "spending" two times the amount of miles for the price of the ticket.
In most cases, it is illegal to sell your unused frequent flier miles or reward points. Most companies/airlines do allow you to gift your unused points to a friend or family member or, in many cases, exchange them for other goods or services. It is important to contact your airline or reward program before you enter into a transaction of any kind to make sure you are acting within the institution's guidelines. It is not uncommon for a frequent flier program to terminate a customer's account and erase their status/membership earnings if they do not comply with the guidelines. It is in the right of the program to cancel your membership.
There are a number of online sites that allow you to convert miles and points. For example, Points.com, lets users trade reward points from one entity to another. Points or miles are not exchanged on a one-to-one basis, but instead work similar to a currency exchange with varying reward amounts for various programs.
For example, a user can convert 5,889 miles on American Airlines to a $25 gift certificate at Starbucks. Additionally, you can exchange points for gift certificates to Sears, Banana Republic, Esso Gasoline and even toward your 529 Plan savings account at BabyMint. The site tacks on a transaction cost of $9.95 to exchange the points or miles or an annual fee of $29.95 for unlimited trades.
Another option for unused miles and points is to donate them to charity. However, the IRS does not view frequent flier miles as "property" or as having monetary value. Therefore, you are not able to take a deduction for your contribution.
Amtrak offers a very generous guest rewards program that offers its passengers access to hotels, rental cars and even luggage for the trip. The program is free and the points earned through the program are readily transferable.
Credit Card Reward Refresher
Credit cards that earn rewards with every purchase are the hottest craze in the credit card industry today. According to Cardweb.com, approximately 40 percent of all bank credit cards have a rewards program affiliated with them. And given the sheer volume of the offers, in the hundred millions, and the accompanying fine print, it is often difficult to determine which programs are actually "rewarding." In fact, according to The Nilson Report, a payment systems newsletter, only 30 percent of credit card users have a rewards card with no annual fee.
The key to maximizing a rewards card is to read the fine print before signing up. While many cards offer an interest rate of zero percent for the first six months, it is important to find out what happens after this period has elapsed as the rates could increase dramatically. You also should find out how you redeem your rewards to ensure that the process is hassle-free with no additional costs attached and be sure to select a rewards card that actually suits your lifestyle and will be of use to you and your family. Most importantly, regardless of the card you choose, only spend what you can afford to pay off each month. It does not pay to earn free airline ticket or $50 cash-back if the end result means you are in debt.
Mellody Hobson, president of Ariel Capital Management (arielmutualfunds.com) in Chicago, is "Good Morning America's" personal finance expert. Ariel associates Matthew Yale and Aimee Daley contributed to this report.