Earning credit card rewards on your vacation expenses is a tempting idea, but it can come with some disadvantages. However, if you play your cards right you can get the benefits of travel rewards without the potential downside.
Interest vs rewards
What’s the downside? If you get stuck carrying a credit card balance for an extended period, the interest you pay on that balance can easily exceed the value of the rewards you earn. After all, rewards provide a one-time benefit of 1 to 5 percent. While credit card interest rates average over 16 percent, an ongoing expense that can continue for years. The deck is stacked against you if you carry a card balance for long.
The solution to earning the benefit of travel rewards without the added cost of credit card interest is to use a travel loan in conjunction with your rewards card. Between the two of them, these financial tools can both earn you travel rewards and limit the resulting interest expense.
Here’s a step-by-step guide:
Step 1. Look for discounts on advance travel payments
If you plan ahead, you may find hotels and airlines that offer substantial discounts if you’re willing to pay in advance. Even if you have to borrow to do that, the size of these discounts could outweigh the resulting interest charges. If you were going to borrow to finance your trip anyway, getting advance payment discounts can reduce the financial consequences of doing so.
Step 2. Find credit cards with travel rewards
This does not necessarily mean choosing a card which offers its rewards in the form of credits towards future travel expenses. After all, if you’re earning rewards by charging the cost of a big trip, you may not have an opportunity to redeem future travel rewards anytime soon unless you’re a frequent traveler.
Instead, the keys are a) making sure that travel is a spending category for which the card offers rewards and b) making sure the rewards come in a form you can readily use, with cash-back being the most versatile.
Step 3. Compare reward terms
Once you’ve lined up possible cards which pay rewards for travel charges in a form you can readily use, see which of these cards has the most generous terms. That may depend on the next step, which deals with credit card rewards cycles
Step 4. Check credit card rewards cycles
Some cards offer elevated reward levels for certain spending categories at specific times. Pay attention to how these rewards cycles apply to travel charges so you can be sure to use the card at a time when the most generous rewards apply to the type of charges you’re making.
Step 5. Shop for the best travel loan terms
Once you know what card you want to use to maximize rewards, now look for a travel loan that will allow you to pay off the travel charges you make on that credit card. Obviously, the goal is to save money by finding a loan with a lower APR (after accounting for closing costs) than your credit card, but you can save even more if you compare lenders to secure the best travel loan terms.
Note that when you compare lenders, don’t simply compare advertised rates. Actual loan rates vary greatly according to the borrower’s credit history and financial circumstances, so be sure to compare based on rates that would apply to your situation. Finally, keep in mind that the shorter the repayment term, the more you are likely to save on interest charges.
Step 6. Get your travel loan approved before you charge your credit card
Before you embark on this strategy, make sure you can be approved to get a personal loan for travel and know what it will cost. Only then will you be able to judge whether this approach will work for you as a way of maximizing rewards while reducing interest charges.
Step 7. Pay off your credit card balance before the first statement cycle
Time really is money in this scenario. Assuming you can find a travel loan at a cheaper APR than your credit card, using that loan to pay off your credit card balance before the first statement cycle will allow you to earn credit card rewards while paying a lower interest rate.
This step-by-step approach could be the best way to finance travel, but it only works if you budget before you borrow. Make sure you can afford your loan payments so you pay off the loan soon enough to limit interest payments. That way, the benefits of this strategy, such as advance reservation discounts and travel rewards, exceed the cost you pay in interest.