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The True Value of Airline Incidentals and Travel Credits
Two weeks ago I kicked off a 4 part series that discusses four of the most hotly debated topics in the travel hacking community. This week I would like to discuss what the true value of airline incidentals and annual travel credits are.
My goal is to offer up both sides of the argument and then have a civil discussion about it in the comments section. The last two weeks have been amazing and I can not thank the readers who commented enough…you guys are great! We had comments that swung on both sides of the argument, everyone was respectful, and everyone brought great points to the table.
The Four Topics
The four hot button topics that we will be discussing over the next month are:
- Opportunity Cost.
- Is Award Travel Really Free?
- The Value of Credit Card Airline and Incidental Credits.
- Should There be a Minimum Redemption for Award Travel?
What Are Airline Incidentals and Annual Travel Credits?
I know pretty much everyone who reads this has heard of the Chase Sapphire Reserve, the Citi Prestige, and the American Express Platinum card. These are the kings of the premium card market. They bring prestige, perks, and travel credits along with their hefty annual fees. I want to focus on that last part today, the travel credits.
These credit cards all have one thing in common, they offer credits to offset their high annual fees. The American Express Platinum offers a $200 airline incidental credit every calendar year. The Citi Prestige offers a $250 airline travel credit every calendar year. And the Chase Sapphire Reserve offers a $300 general travel credit per cardmember year.
Depending on which card you have, these credits can be used on seat upgrades, flights, hotels, drinks, award taxes etc. Because of this they are often looked at as a rebate that offsets the annual fee. People will say the CSR only really costs $150 a year since you get a $300 travel credit. I question whether or not that is accurate though.
The Value Of These Credits
We have all seen the posts and comments where someone discounts a card’s annual fee because of travel or airline incidental credits. I’ll give you an example:
Get the American Express Platinum card with a 100,000 sign up bonus. It comes with a $550 annual fee but you get 2 – $200 airline incidental credits your first cardmember year. That means you really only pay $150 out of pocket for all of the perks plus a 100,000 sign up bonus!
I have personally been sucked into this line of thinking in the past. And I know a lot of people out there agree with this train of thought. We all are travel junkies which means we travel a lot. And when we travel we tend to spend money on award taxes, hotels, or plane tickets etc. So if we are spending the money anyway then what does it matter if it comes from a credit card travel credit or not? People think – I would have spent it anyway so this really is a discount on my annual fee.
The other trap people fall into is that the travel credit is free money. This is not as prevalent but I have seen people claim that part of their trip was “covered” by their travel credit. These are not free. You paid for them up front so please stop thinking that way. They are a sunk cost which you have to use but they are not “free”.
I believe there are a lot of the people in this hobby that think of these credits as a discount off of their annual fees. They also value these credits at 100% of their listed amount.
Do I believe that these credits discount a cards annual fee? 100% yes I do! Do I think the credits should be taken at their face value? 100% no I don’t. There are a four different reasons why.
You are giving the banks an interest free loan. If you pay your annual fee on January 1st but don’t use your travel credit until August of that year then you gave Chase etc. a $300 interest free loan for 8 months. With today’s interest rates this doesn’t amount to much but it should still be considered.
You are locking yourself into using that particular card for your travel. You are forced to use that particular card until you use up your entire credit otherwise you risk losing some of it. Most of the time the premium card may be the best option anyways but it limits your choices and flexibility. Would you rather have 2 SPG points or 3 UR points? How about 12 Hilton points or 3 UR points? Would you rather have 5 MR points or 3 UR points? These are all examples of decisions that are made for you until your credit is used up.
The main reason I think travel credits should be discounted is because most of what is covered by the credits can be purchased at a discount via gift cards. Airline gift cards can be bought for 10-15% off. Southwest was on sale from PPDG just yesterday. Uber gift cards are on sale all the time. It is possible to get hotel gift cards at a discount, Hilton has a 20% off Amex Offer right now. If you can purchase these things at a discount then shouldn’t the credit be discounted as well?
Lastly, there is going to be some breakage. Even some experienced players in our hobby have had a portion of these credits expire. That is what the banks are hoping for.
I know there is going to be some disagreement about what I just said. A good rebuttal is what about public transportation? I agree that it is difficult to get public transportation at a discount. I would say that even if you buy a $300 metro card on day one to maximize your value the bank forced you into buying more than you needed at that point in time. And there is a chance you could lose the card with money on it. It is still a valid point and if you regularly use public transportation then you may not discount the CSR credit but it doesn’t work for the others.
Another valid rebuttal is that there will be times where you couldn’t plan ahead and purchase gift cards etc. And someone shouldn’t be sitting on a stack of them. While this is true you still gave the bank an interest free loan and locked yourself in to using their card to make the purchase. So there should be some discount for that.
How Much Should the Credits be Discounted?
Now that we have discussed that travel credits should be discounted how do we decide by how much? The answer to this would depend on how you make valuation decisions. Do you value things based on their replacement cost or on their cash value?
If you value things according to their replacement cost then I think a 10-15% discount is in order. That is the amount most of these gift cards are discounted when you go to purchase them.
If you value them based on their cash cost then that value would be 15-20%. That is the amount most of the gift cards could be sold at on the open market.
I usually discount the credits 10% when I am making a decision on whether or not to keep the card long term.
While I think travel credits have value I don’t think they should be taken at face value. In my opinion they should be discounted at least 10% when you are making your decisions on the worthiness of a credit card. They are still an important part of the premium card’s offerings.
At one point in time it was possible to make a profit with your travel credits the first year you had the card. Back when the CSR allowed them once per calendar year, even if you discounted the amounts you still came out ahead.
Maybe the easiest, most concise argument I could make is would you rather have a $300 travel credit or a $300 statement credit? I am guessing you would take the statement credit and that is because the $300 travel credit is not as valuable.
Do you think premium card travel credits should be taken at their face value? If yes, let us know why in the comments section. If no, let us know how much you would discount them and why you think that in the comments section.
Please remember these are only opinions and to be civil. Enjoy your weekend! And Happy Thanksgiving!!!
Miles to Memories has partnered with CardRatings for our coverage of credit card products. Miles to Memories and CardRatings may receive a commission from card issuers.