Credit card surcharges: worth paying to earn frequent flyer points?

By Chris Chamberlin , May 8 2015
Credit card surcharges: worth paying to earn frequent flyer points?
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You should seek independent advice and consider your own personal circumstances before applying for any financial product.

Credit cards are a great way to notch up frequent flyer points on the money you spend every day, but is it worth paying a credit card surcharge just to earn those points, or are you better off reverting to ‘savings or cheque’, or even cash, when it costs more to pay with plastic?

In short, that depends on how high the surcharge and how many points you’ll get in return – here’s where it makes sense, and where it doesn’t.

A blanket surcharge on all credit card payments

Let’s say you’re staying at an Australian hotel with a predictable 1.5% credit card surcharge, but where you can earn 1.5 Qantas or Virgin Australia Velocity points per dollar using an AMEX – such as ANZ Frequent Flyer Black, CBA Diamond, NAB Rewards Premium or Westpac Altitude Black.

You’re effectively then ‘buying’ frequent flyer points for one cent each, and even when redeeming them for a Sydney-Melbourne flight, the numbers are firmly in your favour to pay the surcharge.

On that short hop with Qantas, you can squeeze around 1.61 cents of value per point in economy or 4.49 cents per point in business class, while with Virgin Australia it’s a slightly-higher 1.85c/point down the back and 4.91c/point up the front.

In short: You’d be paying 1.5c in the dollar to earn points with a total potential value of around 6.73c with Qantas or 7.36c with Virgin Australia, which far exceeds the cost of earning those points.

Credit cards with lower earning rates may not present the same value, as those that amass only 0.5 points per dollar logically have a ‘cost per point’ of 3c when a 1.5% surcharge is effected, so unless you’re redeeming points for business class flights, best switch to EFTPOS.

3% AMEX surcharge, none for Visa or MasterCard

If you’re a ‘points pro’, you’ll likely be armed with one those AMEX cards above to earn 1.5 points per dollar wherever it’s accepted, and have that paired with a ‘backup’ Visa or MasterCard for at least one point per dollar everywhere else.

When a merchant accepts both cards but charges an extra 3% for American Express, every extra point earned over and above what your Visa or MasterCard could deliver is really costing you 6c a pop.

In this case, paying the 3% surcharge only makes sense if you have a specific use for your points in mind which would squeeze more than six cents per point in value, or if you’re getting close to having enough points for your desired flight or upgrade and need that little bit extra to get over the line.

Also keep in mind that what you’re buying could in fact be available from a competing business that may have no American Express surcharge, in which case be prepared to walk and buy that item elsewhere.

Different surcharge rates for different card types

Vodafone’s credit card surcharges, for example, vary depending on which card you use: there’s a 1.1% fee for Visa and MasterCard payments and a higher 2.37% fee for American Express.

Assuming you earn one point per dollar on Visa or MasterCard payments, that’s 1.1c per point earned. With an AMEX that nets 1.5 points on the same spend, you’re looking at a higher 1.58c per point.

Rydges Hotels in Australia provide a similar example, with a 1.5% fee for Visa and MasterCard transactions and a 3.5% surcharge for American Express.

There your points will cost 1.5c each on the same Visa or MasterCard used with Vodafone, or 2.33c per point with a similar AMEX card.

The verdict: Unless you’re using points to fly on economy routes where ‘real’ fares are already relatively cheap, there’s merit in taking either road in this case.

If your opportunities to earn frequent flyer points are relatively limited, you may wish to pay the higher surcharge to squeeze the most points from your transactions – but if your frequent flyer balance already sits in the six or seven figures, the cash saving might bring you the best personal value.

Also read: Fuel discounts vs frequent flyer points: which is better value?

Follow Australian Business Traveller on Twitter: we're @AusBT

Disclaimer

Executive Traveller may receive a commission when you apply for these credit cards via our links.

You should seek independent advice and consider your own personal circumstances before applying for any financial product.

Chris Chamberlin

Chris Chamberlin is the Associate Editor of Executive Traveller and lives by the motto that a journey of a thousand miles begins with a single step, a great latte, a theatre ticket and a glass of wine!

Qantas - Qantas Frequent Flyer

19 Nov 2011

Total posts 246

Not a fan of surcharge or booking fees or service fees or whatever they call them, in principle. Just sell consumers the product and leave it as is...

Qantas - Qantas Frequent Flyer

08 Nov 2011

Total posts 114

I'll actually avoid businesses that charge a surcharge and take my business elsewhere. Only places I'd stomach it is at a restaurant, but even then I'd not want to go back a second time...

Agreed – 3% surcharge? 99% chance I'll shop elsewhere.

(But sometimes you just can't avoid them because they all charge the same fee, like in the big chain hotels...)

Qantas - Qantas Frequent Flyer

12 Jun 2011

Total posts 122

Yet the surcharge only applies to those chains in Aus... Sigh. 

Qantas - Qantas Frequent Flyer

26 Sep 2014

Total posts 50

Same here as they are just passing the fees banks/cc companies charge them on to their consumer.  It's one thing if it's a mom and pop operation however for large businesses it's a fee they should absorb as a cost of doing business. 

Telsta and Event Cinemas are surcharge chargers but also accept PayPal so to avoid the fee I pay those companies via PP which itself if linked to my Amex.

11 Apr 2014

Total posts 14

If you set up a direct debit to your credit card with Telstra you'll now avoid the usual surcharge. It's only when you make ad hoc payments that you get stung.

Qantas - Qantas Frequent Flyer

26 Sep 2014

Total posts 50

Fair point but with Telstra's history of "mistakenly" overbilling credit cards and the ensuing drama to obtain a refund, I will stick to PayPal.

Virgin Australia - Velocity Rewards

19 Mar 2014

Total posts 574

A lot of the surcharge comes through AMEX. Make no mistake, that the alliance between Visa and Mastercard leans on merchants to pass on a surcharge for Amex, effectively deterring people away from AMEX. Unless a) it's not their expense (company etc.) or b) the surcharge is worth the points.

Great artcile breaking it down. I believe we'll see a more dynamic AMEX in the market in future. It has long been the status quo that we have an AMEX card but when there's a surcharge, we reach for the Visa or MC. Coupled with the merchant comfort that they won't lose a sale as someone just pulls out the other card. Little do they know that many people remember and adjust the buying behaviour accordingly!

Virgin Australia - Velocity Rewards

28 Apr 2014

Total posts 37

Had the most ridiculous waitress the other day in a country town restaurant: she brought out the bill inside the ubiquitous American Express leather folder (see image in the article which reminded me of the situation :-), whipped out my Westpac Altitude Black AMEX to pay, only to be told they don't accept AMEX...

U just couldn't resist the poor girl explaining why that was ridiculous. She laughed embarrassingly and accepted the Altitude Black MasterCard instead..!

QFF

19 Sep 2013

Total posts 155

Definitely worth paying the surcharge every time. Recently, I advised my partner to my a $5 surcharge because it was worth $23 in air fares. I also convinced her to build a new house using Amex, to score most of a J RTW. Also bought my last car using Amex. While I don't like paying excessive surcharges, I'll still do so, until the airlines "enhance" their FF schemes to remove this benefit.


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