No. of Recommendations: 1
Taking advantage of bonuses paid in consideration of opening new credit cards (I am currently using between 2-6 new credit cards to pay off a cruise using just the bonus amounts of each - providing approximately a 15% rebate in cash and/or frequent flyer points - the cards will be closed in a couple of months). It has been many years since I've bought a seat on any flight of over a few hours in length for cash.
So, while someone looking at my payment history (zero blemishes) is happy to bribe me to chose them to provide credit, apparently no one looks at the cost of that credit history to the banks.
Banks are actually delighted to give you the sign up bonus, even if you later cancel. Here are how the economics works: For these types of cards, there is typically an annual fee and a minimum spend requirement to get the sign-up bonus. And sometimes there is a second bonus for additional spend. Banks of course get the swipe fees, so they will earn a decent amount on fees. And you have to have pretty good credit and income to qualify for these kinds of cards. So their downside risk is pretty well capped.
But people tend to keep rewards cards longer than other cards, because you also get benefits with the airline (like maybe a free checked bag and early boarding) plus you keep earnings points, hence earning swipe fees for the banks. Having a minimum spend also means you CAN spend that amount, so you're the type of customer they want.
It works for the airlines too. Banks buy frequent flyer points at a discount from the airlines. This is a good deal for the airlines because they are getting paid up front for a seat that hasn't been booked yet. Basically, it is interest-free float. But the airlines can restrict the rewards seats, preferentially towards seats with low demand. The incremental cost of adding one additional passenger as opposed to flying an empty seat is pretty small. The free checked bag costs them almost nothing extra, and providing early boarding costs them nothing extra at all. And you're also now enrolled in the airlines frequent flyer program. So you'll like wind up buying a few more trips with them than you otherwise would have.
That's why airlines push these cards so hard. Airlines make as much or more money from their rewards programs than they do by flying airplanes. And note, the airline rewards programs has been moving away from how much you fly, to how much you spend on the card. And now *everyone* has early boarding and lounge access, they just aren't the perks they used to be. Airlines have responded by devaluing the rewards and making it harder to get elite status by actually booking trips on their airplanes.
So if you have reward points of any type, spend 'em while you got 'em. They don't earn interest and are likely to be devalued in the future, so no reason to hoard them.
