How do airline credit cards work?

By  |  Published: August 9, 2017

Opening Credits
Columnist Erica Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.

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Question Dear Opening Credits,
I am trying my best to understand how credit cards work, specifically airline credit cards. I hope you can bring some clarity to my confusion. My first question is how can I calculate my own APR before I make a purchase? What is the difference between no annual fee and annual fee? Which one is best? The American Airlines credit card allows you to use the card to pay for hotel stays. If I use it for hotel stays, will I have to pay a higher annual fee? If you use a credit card once a month out of the year, do you only pay for the one month you use it or you still have to pay for the rest of the year? – Ann

Answer

Dear Ann,
I completely understand your confusion! If you haven’t used these credit cards before, they can seem complicated. Here’s the scoop:

To answer your first question, most credit cards advertise a range of interest rates. You won’t know which annual percentage rate (APR) you will qualify for until you are approved for the card. Your APR is the interest rate charged on credit card balances expressed in a standardized, annualized way. The APR is applied each month that an outstanding balance is present on a credit card.

To determine the amount of interest that will be added to a purchase if you choose to pay a balance over several months, use a credit card payoff calculator. Plug in some sample numbers now, to see what it may cost you to carry a balance from month to month on the card. For example, if you charge $1,000 to a card with a 21 percent APR and paid it off in three months, the interest charges would total $35. Spread the debt out over a year and the interest would be $117. Know that no interest will be added if you pay off the entire amount you charge each month.

Most (but not all) airline cards carry an annual fee, which is typically assessed when you open the card and then on your anniversary date of opening the card each year after that. Oftentimes, an annual fee is waived the first year. The fee is typically less than $100 for airline cards.

The Frontier Mastercard and the JetBlue credit card are two airline cards with no annual fee. (Frontier and JetBlue also offer credit cards with annual fees that have sweeter sign-up bonuses and rewards.) 

A credit card’s annual fee does not change depending on where or when you use a card.

Airlines work with a bank or credit issuer and a payment transaction company such as Visa or Mastercard to develop a co-branded credit card. For example, United Airlines partners with Chase and Visa for the MileagePlus Explorer card ($95 annual fee), JetBlue has teamed up with Barclaycard and Mastercard for the JetBlue Plus card ($99 annual fee) and Delta Airlines joined with American Express (which conducts its own transactions) to develop the Gold Delta SkyMiles card ($0 annual fee the first year, then $95) – and so on.

All airline credit cards offer the cardholder travel rewards. If you book your flight with the partnering airline, you may receive priority check-in, upgraded seating, complimentary baggage check or entry into a VIP lounge. Each card has its own bonus point plan, too.

You will often get a certain number of points for spending at least a minimum amount of money with the card in the first few months of being approved. After that, each time you charge with the card you’ll earn more points. You can redeem those points to get free flights or for something else, such as statement credits, gift cards or merchandise.

When looking at all the available airline card options, you should focus on the airline you like to fly, then check the terms for the cards affiliated with that airline. Some airline cards will have higher annual fees than others, but you can come out ahead if the value of the benefits is greater that what you pay annually.

For example, let’s say you tend to check a bag when you travel. That might cost $25 for each leg of the journey. If the card you like has a $95 annual fee and covers checked baggage, you’ll break even with two round-trip flights – and you will come out ahead with each additional flight for which you check a bag.

You can use airline credit cards anywhere the credit card network (i.e., Visa, Mastercard or American Express) is accepted, including hotels, rental cars or even gas and groceries.

And no, you won’t be financially penalized for spending with the card once and paying off the balance. However, to avoid having the issuer cancel the card due to inactivity, and to keep the card and your rewards points active, you’ll need to take it out for a spin every once in a while.

See related: 6 times to forgo big rewards for a basic, low-interest card, Best airline cards of summer 2017, Are airline cards worth the annual fee?

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Updated: 10-18-2017

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