Best credit cards for travel: Miles, points, and no foreign fees

Your spending habits and how frequently you plan on traveling overseas will be big factors in which card is best for you. At the moment the credit card companies are competing fiercely for new business so new offers are coming out all the time. These cards can also disappear (for potential customers) as quickly as they appeared, so keeping up with all of them is nearly impossible.

>>>A list of the best travel credit card deals we can find is down the page

Below are the important variables to look for. It’s likely that only a few will apply to each person, so once you figure that out the picture becomes more clear.

If you will travel overseas, look for a card with no foreign transaction fees

One thing that drives many of us to look into a “travel credit card” is that we find out about how quickly the “foreign transaction fees” can add up during trips abroad. Put simply, if you use a credit card to pay for something outside of your home country, it will cost you about 3% extra right off the top. But it’s not just when you are actually in another country that this can happen, you also get charged a fee when booking a flight on a foreign airline from home, or for when you book hotels from home through a foreign hotel-booking company (these are often otherwise the cheapest).

So let’s say a couple is planning a 2-week trip to Europe and they are going to spend US$5,000 between them. The foreign transaction fees alone on that amount would be US$150, and that could basically cancel out any rewards you might receive for those purchases. The key is, if you are traveling abroad, you want to get NO FOREIGN TRANSACTION FEES and a good rewards program because many cards offer both. If you choose one or the other, then it’s probably not worth it.

Credit cards with no foreign transaction fees are actually the cheapest way to travel

You may have heard the common advice that it’s best to use ATM cards to get cash and pay for as much as possible that way because it gives you the best exchange rate. It’s true that you do get an extremely fair exchange rate when taking out cash, referred to as the “interbank exchange rate.”

But since about the year 2008, it’s become extremely challenging to find an ATM that doesn’t ALSO tack on a local transaction fee of about US$5. Worse still, the vast majority of normal ATM cards also have withdrawals subject to a transaction fee of about 3% by your own bank. In these cases, getting cash actually costs more than using a normal credit card, and it costs a LOT more than using a travel card with no foreign transaction fee.

So as strange as it may sound, the cheapest way to pay for hotels, meals, souvenirs, and transport is by using a credit card, as long as it has no foreign transaction fee. They offer essentially zero fees so you pay only what is on the price tag. Even traveler’s checks have some small fees, and it’s also increasingly difficult to find anyone who takes them.

Airline-specific credit cards have lost their appeal

Not long ago it was possible to book a couple of cheap round-trip flights across the country and already be close to earning a free ticket on that same airline. But those days appear to be pretty much over, as two of the three big US airlines have announced that they are switching to money spent rather than miles traveled for their points. As a result, business travelers will earn far more points, and budget travelers will earn far fewer.

This is the new reality, and it also means that the airline-specific credit cards aren’t a wise choice for most of us. They used to offer tempting extras for those who flew often on that airline, but as the miles become harder to use as well as harder to earn, it probably makes more sense to go with a rewards card with a wider variety of ways to earn and ways to spend the points.

Points and rewards cards are getting better

Credit card companies make money whenever their customers use the cards for purchases, whether they pay off the balance each month or not. Because of this, they are all competing to be the first-choice card for those who use their cards frequently, so they offer tempting bonuses to outdo each other.

When considering a credit card for travel, the level of rewards for each purchase are one of the most important factors to consider, especially if you generally pay your balance off each month. Some cards give two points per dollar spent, while others get as high as 5 points for certain kinds of purchases.

Look for big sign-up bonuses as probably the best feature of a travel credit card

If you have above average credit, chances are good that you are receiving regular offers in the mail from credit card companies, usually tempting you with a big bonus if you spend a certain amount (usually around US$3,000) in the first few months. These bonuses may look like scams, but the ones from the major credit card companies are actually legit, so they should be at or near the top of the criteria you use to pick a new card for yourself.

Some of the popular travel credit cards offer the equivalent of US$500 in (real) travel spending credit for customers who charge US$3,000 in the first 3 months. The annual fee is a high US$95, but the first year is waived so as long as you spend enough to earn the bonus, the card pays for itself for at least 5 years. As long as your credit is good, you’ll no doubt get newer offers on a regular basis, so savvy consumers can switch to a new card with a new bonus long before the annual fees start eating into your overall savings and rewards.

If you don’t pay off your balance, go for the lowest interest rate

You might see advertisements for travel credit cards that offer big sign-up bonuses and generous rewards points, but of course those things come at a cost. If you are one of the many people who doesn’t pay off your credit card balance each month, then it’s unlikely that a rewards card is going to be your best choice.

If you pay your balance down to zero on many or most months of the year, a rewards card might make sense, but for those carrying balances most of the time, you are really best off just finding the best interest rate. In the best cases you might find a card at 12% APR, and the worst ones are more like 25% APR but they can include rewards. It’s very unlikely that the benefits will come close to making up for the extra interest you’d pay to get them.

If you have “average credit,” be sure that any rewards are worth the higher interest rate

In a cruel twist that you may not be aware of, people who “need” credit the most and sometimes struggle to pay all their bills each month, will have to pay a higher interest rate than those with very good credit. Credit card companies often refer to this as “average credit” (and if you have bad credit then getting any credit card is almost impossible).

If you have average credit, you’ll have to pay an interest rate for any balance you run at 20% to 25% APR in most cases. So if you are fairly sure you can pay off the balance of a new credit card each month, you can probably get some really worthwhile rewards and bonuses. But if you tend to run a balance, the higher interest rate will probably cancel out any perks you’d get.

Consider the annual fee, of course

This should go without saying, but it’s important to factor in the annual fee for any travel credit card. Typically they are waived for the first year, but not always. Most rewards cards have an annual fee $75 to $95, which is a lot if you don’t plan on using them much, but quite reasonable if you use them regularly to rack up rewards points.

With this in mind, it’s wise to focus on having exactly one rewards/points credit card and use it for everything that earns credits.

Additional photo credit: Top photo by reynermedia on Flickr