Most travel reward credit cards offer cardholders benefits such as zero foreign transaction fees, trip-delay coverage, baggage insurance, and rental car insurance. According to Forbes, travel rewards are basically perks that you get when you spend money on travel-related purchases or expenses. When accrued, they can add up to significant savings and significantly enhance the quality of your travels. These rewards are usually categorized based on issuer, source, and structure. Understanding the different Types of Travel Rewards can help you harvest them more effectively and increase your savings. In this article, we review travel rewards and the different forms in which they are offered.
What Are Travel Rewards?
Travel rewards refer to credits accrued on designated credit cards. When cardholders spend money on designated vendors or items, they earn points that can be converted into currency when they reach critical amounts. According to Trek Baron, the conversion can be direct or indirect. Direct conversion involves redeeming the monetary value of the points and spending it at your discretion, while indirect conversion involves getting discounts on travel-related purchases and payments. The rewards can also be conferred as gifted benefits such as complimentary airline ticket upgrades, free hotel accommodation, and access to lounges. Overall, travel rewards promote savings and allow you to enhance your travel experience at no extra charge. As the name suggests, you are being rewarded for traveling.
Types of Travel Rewards
As mentioned, there are multiple types of travel rewards, all categorized by source, issuer, and structure. These rewards will usually vary in how they are offered from credit card to credit card, but this review tells you what to expect in a typical scenario. Let's break them down:
1. New Member Bonus Points
It is standard practice for travel credit cards to offer free bonus points to new members. This is done to entice new customers and encourage them to keep using the card by kick-starting their point accumulation. Since you can only redeem these points when you reach a set threshold, these initial points inform your accumulation strategy and allow you to target your spending so that you can increase your points. This instills the card habit in new customers and benefits both parties. In most cases, the new member bonus points are significant and can be redeemed within several months on big-ticket items like hotel stays. This usually holds even if you maintain a regular spending pattern.
2. Transferable Points
The second type of travel reward is transferable points. According to Nerd Wallet, these are reward points available in one travel credit card plan that you can convert into the currency of a different plan. For example, you might be able to transfer the points accumulated on a flight program (airline miles) into hotel points on an accommodation plan. Such rewards are governed by variable conversion rates that determine the number of points you receive in the recipient plan from your incoming points. The conversion is rarely direct or one-to-one, which is the catch. In some instances, you can cash in transferable points for a fixed value by spending it on an approved portal or getting statement credit or cash back. These transfers and cash-ins are irreversible, so it is advisable to take your time before making them. Sometimes, using your points in their original program is more profitable than transferring them.
Perks are not technically points – these rewards are offered as access items. Typically, they include benefits like foreign transaction fee waivers, inflight upgrades, flight cancelation reimbursement, priority check-in, accommodation upgrades, and access to transit lounges. They are usually offered to increase the value you place in the travel reward card and establish loyalty.
4. Fixed-Value Rewards
Fixed-value travel rewards have a stated monetary value. Due to this transparency, this system is synonymous with fast and confident redemption amount calculations. These rewards do not come with any hidden variable, which allows for more manageable budgeting. There are four varieties of fixed-value rewards, often varying within a narrow range. They are:
- Travel-Restricted Statement Credit Program: This is a cashback program that allows you to redeem your accumulated points against travel products and vendors only. You get the option of paying for a qualifying expense by redeeming points every time you incur one.
- Cashback Program: This system allows you to accumulate rewards as cash on your traveler’s account. You can use this cash later and at your discretion, with many cardholders opting to apply for a statement credit. This is where your reward is netted against your statement.
- Fixed Value Airline Points: This program links a given number of reward points to the cost of an airline ticket. Simply put, you travel for free when you accumulate a specified number of points. This program creates a type of exchange rate between the points system and the currency or denomination used by your travel agent.
- Travel Portal: This is an online program in which the purchases and expenses are restricted and cannot be bought anywhere other than on designated online portals.
Fixed-value plans are categorized as standard or eraser. Eraser plans allow you to use your rewards to net your debit balance, while standard plans provide a set value for qualifying purchases. In some instances, you can transfer fixed-value rewards to a variable-value rewards plan or partner program. This creates a hybrid profile system.
5. Variable-Value Rewards
Variable-value rewards are the opposite of fixed-value rewards. In this case, the reward is quoted in terms of items awarded per point, such as “A free hotel stay for every 15,000 points earned”. The value of the reward item is not specified. Thus the value of the exchange remains unknown before you redeem your reward and can vary widely depending on the price of the underlying commodity. Variable-value rewards are divided into dynamic and standard reward plans. Standard plans work as we have described in the previous example, while dynamic plans include a conversion rate that changes depending on the price of the item. Essentially, the terms of a dynamic variable-value plan can render it a fixed-value reward plan, so you have to pay attention when redeeming. You need to weigh the benefits of redeeming this point at a given time compared to making a higher value redemption in the future. If you are keen, you could make huge upside returns.
6. Air Rewards (Points)
Most airlines offer frequent flyer points to repeat customers as a reward for their loyalty. The program does not derive the value of the redeemed points from the price of a flight. Instead, the connection between your points and the reward is a function of your target destination, distance traveled, and history on the program. This means that prices and points are decoupled, and opportunities may arise where you get premium flights for a fraction of the regular price. Usually, the opportunity to fly better for less tends to arise when you buy premium products very close to expiry. The airline is trying to optimize its cost strategy so it can offer concessions on airline prices if, close to the departure, it happens that the flight is not full. This system rewards loyal customers while maximizing the airline's revenue.
7. Air Miles
Some airline credit cards accrue air miles rather than points. Like point reward programs, mile systems accrue miles as you spend money at eligible vendors. A 5X travel credit card will earn you five air miles for every dollar you spend on qualifying expenses. Typically, the offerings are complex and depend on several factors, such as the type of spend. For instance, you may earn 3X on a regular qualifying purchase and 4X on a purchase made at a partner of the program, such as a sponsoring restaurant. You can usually redeem your air miles against air tickets and get a free airline ticket if you have collected enough miles to surpass the distance of your flight. When you do this, the airline will deduct the miles you have redeemed from your balance, and you can do this again as long as you have enough miles. Note: Some airlines run partner programs that allow you to transfer your air miles to partner points. The opposite may also be true. However, the conversion rate can take away from the actual value of your miles, so you need to be careful before making a transfer.
8. Car Rental Rewards
All major car rental firms have active reward programs for their customers. Unlike hotel and airline programs, which are somewhat standardized, car rental reward programs tend to vary widely from one company to the next. This means you need to weigh several available options, hedge them against each other, and pick the one that works best for you. That said, all these rewards work pretty much the same as other rewards discussed here. You accumulate points by using the car rental's services or products and then redeem these points with the rental company and its partners. You can even redeem the points as future rental payments. As car rental companies receive consumer feedback and modify their programs, each available program becomes distinct from the next. You can consider several plans and compare their rewards to your preferred airline and accommodation plan to find a rental company that offers you the best value.
9. Accommodation Rewards
Hotels and hotel groups also run travel-related reward programs to retain regular customers and attract new ones. These programs work similarly to fixed and variable-value reward programs and offer accommodation-related perks. For example, you can get free or discounted stays in participating hotels by purchasing tickets or products from a partnering travel agency. There are several factors you should consider when picking accommodation rewards, such as:
- Quality: Always check that the hotel offering accommodation rewards has an acceptable level of convenience and comfort. A free stay is of little benefit if the accommodations are uncomfortable. Additionally, you should consider the value of some trade-offs. If the standard is constant, two free nights at a 3-star facility are better than one night at a 5-star hotel.
- Eligibility and Partnerships: The nature and number of partners in the reward program are important because they inform how easily you can accumulate and redeem your rewards.
- Size: If the program is run across a large number of member hotels, you are more likely to intersect with it during your travels than if the group is small.
- Transferability: Go for a program that allows you to transfer your points. However, avoid highly erosive conversion rates as they could reduce your reward value post-transfer.
10. Other Rewards
Vacation vendors and program partners often run indirect reward programs that can only be classified as others. They do not offer the rewards themselves, but since you can spend your accumulated points through these vendors, they are part of the value accretion. Here is a look at both:
- Vacation Vendors: Although holiday spending is not strictly travel-related, it is part of your overall travel budget. You can look for vendors whose products or services correlate with your expenses and that have loyalty programs. You should also look into transfer possibilities into areas of vacation spending like Uber rides and the like.
- Program Partners: Some program partners to regular reward sources – airlines, hotels, and car rental companies – fall outside the travel sector but allow you to redeem and spend your rewards. These partners will usually have loyalty programs of their own, and you should research how these intersect with your primary program so you can accumulate maximum points.
Understanding the Ten Types of Travel Rewards is the first step toward enhancing your travel experience and cutting your costs. Beyond this, however, there are many providers within one type of travel reward, and the best way to vet these is to read online rankings and ratings. Weigh the merits of different travel reward cards against each other and pick one that saves you the most money and meets your travel needs. If you travel a lot overnight, you need to lean heavily on air miles and accommodation rewards, but you also need to find a program with vendors and partners in your usual travel routes. Chase also recommends finding a program that rewards heavily on the products you purchase most.
Written by Allen Lee
Read more posts by Allen Lee