We keep getting bombarded by advertising and blogs promoting free first-class flights or luxury hotels to exotic destinations by following some credit card advice. Social media is full of gurus trying to persuade you to get a product that will magically make you travel for free around the world without effort.
Unfortunately, there’s no such thing as booking a free vacation. Booking a vacation always incurs costs that we might be oblivious about, and I will list some of the expenses that we must consider to make a smart decision with your travel. Let me help you debunk some myths.
Apply for a credit card and travel for free! Myth
Credit cards can be a fantastic financial resource when used correctly. Also, there are so many credit products out there that it can be confusing to get the right one for your lifestyle. Most importantly, there’s no such thing as a free vacation for applying for a credit card. I’m a big fan of credit cards (I currently have 20) that match my spending habits and lifestyle. If a credit card’s benefits outweigh the cost, I’m happy to keep it, use it, and recommend it to my friends.
However, even a credit card that seems a fantastic fit for you and promises you free travel still has some evident and not so evident costs. I’m listing some of these costs below:
The annual fee. If your credit card has a fee, make sure you are taking advantage of all its benefits, and they are more valuable to you than the annual fee. You might need to analyze every year if you are getting all the value from your credit card. There are some great no annual fee credit cards, and possibly they are a better fit for your goals.
Manage your credit responsibly. A credit card application incurs a hit on your credit report, so make sure you minimize any negative impact. You must know your credit score before you apply to a credit card since, if it is low, you will likely get rejected. Even though the negative impact of a credit application could be minimal, and in the long run, boost your credit score, it can still, negatively, affect your immediate plans.
Plan your credit applications. Even if you find the perfect credit card for your lifestyle, make sure it will not affect your immediate and medium-term plans. If you are planning a large purchase that requires lending even a small dip on your credit score could place you on a different credit rate. You could miss a lower lending rate for a few credit score points. A better lending rate on a 30-year mortgage or a 60-month car loan is a better investment than a credit card with a bonus.
Overspending to meet a sign-up bonus. All of the premium credit cards, the ones with the best perks and larges bonuses, require minimum spending. Make sure you are not spending more or changing your spending habits only to meet the bonus requirements. Be realistic about how much you spend to make sure you can meet the bonus you are targeting.
I use my points and miles! I travel for free! Myth
Points and miles are fantastic. I have traveled, around the world, several times thanks to them. I love my points and miles. However, they are not free, and as long as you don’t realize how much they are worth, you might be losing a lot of money. Points and miles are a return on your spending habits and your reward for being a good consumer. Points and miles, like currency, lose value over time, similar to inflation. Airlines and hotels are constantly changing their award charts, usually devaluing their reward programs. We need to accept that, and not hoard your points and miles. Learn how much your points and miles are worth to you to make an intelligent decision to use them. For example, after a search on American Airlines, I compared two tickets: One first-class flight to El Paso, Texas for 109k miles, and another first-class ticket to Lima, Peru, for 96k miles. In this specific scenario, we can agree that the best value is the ticket to Peru.
Yet, how much more of a better deal is the trip to Lima? We can get an exact amount by comparing the cash amount of the same ticket. The first-class ticket to El Paso costs $1,651, while the fare to Lima costs $6,138 if you pay instead of using miles. Therefore, if you use your miles to travel to Lima, you are getting $6,138 for 96K miles or 6.3 cents per mile while the trip to El Paso gets you $1,651 for 106k miles or 1.5 cents per mile. 6.3 is more than 1.5, and now you know exactly how much more value you are getting. The example I used was extreme but easy to explain.
Also, when paying with miles, consider other taxes and booking fees that might negate the benefits of your award. In my previous example, if you pay with miles to El Paso, you still have to pay $11.20 and for Lima $72.79. Even with these extra fees, the flight to Lima is a better deal, but there are cases that additional charges are so high, that it’s not worth to use your miles and you have to pay attention if it makes sense to you.
I won a vacation! My travel is free! Myth
Sometimes we get lucky, and we might win paid-for vacations. Even in this case, there are some costs that we must consider:
Lodging. After you get to your destination, do you have to pay for your stay?
Dining. Most people that travel dine out every day, three times per day.
Shopping. Do you have a budget to spend in souvenirs, clothing, gifts, etc. ?
Transportation. Travel from/to the airport can be costly. I’ve paid more for a taxi to the airport than a flight in Europe. Also, transportation at your destination, are you going to use public transit if available, or use other options?
Vacation days. We should value our days off like gold. Even though many industries are moving toward more flexible schedules, for many people taking days off or accruing vacations is challenging and also disapproved. Now I’m fortunate to have a flexible schedule, but in the past, I struggled to get a day off, requesting an entire week was almost impossible. Learn to value the worth of a vacation day and a night of good sleep. Is it worth it to sleep at the airport rather than at your home to save some money?
Today I have listed some costs that we should consider when booking a vacation or trip. I’m an advocate for award travel, and I hope you can use your miles and points to book holidays, enjoy new experiences, or visit your loved ones. My goal is not to deter you from booking award travel but to make sure you maximize the worth of your credit, the value of your points and miles, or even a paid ticket. All these useful resources are tools to achieve our lifestyle goals; let’s make sure we used them intelligently.
Safe travels and adventures!