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Who Really Owns YOUR Credit Card Miles & Points?

One of the great perks about using credit cards is the ability to earn miles and points whenever they are used for purchases. This earning potential is so significant that there are actually many forums, blogs, groups and even a ‘university’ dedicated to helping consumers understand the myriad of benefits and rewards programs available to them by the credit card companies and how to maximize on these opportunities. Many consumers have taken advantage of these options and turned their spending habits into significant side income earning ventures and vacations. An additional way to earn value is through frequent flyer programs that reward travelers by giving them miles and points based either upon the length of miles traveled or the price of the ticket purchased.

But the ability to earn miles and points comes with a significant catch, namely, the fact that the miles and points one accrues from purchases and traveling doesn’t really belong to the individual and in fact really, never belonged to them in the first place. And if this dynamic sounds strange, unfair, and perhaps even illegal to you, well, you are not alone.

In a widely publicized case that occurred in 2013, a rabbi sued Northwest airlines claiming the airline dealt unfairly with him when they forfeited his frequent flyer status and hundreds of thousands of miles he accrued. The case was fought in court at various levels, and finally heard by the Supreme Court which rendered a decision against the rabbi.

To provide some background to the case, in 1978 the Airline Deregulation Act was passed which limits the types of lawsuits flyers may file against airlines as well as the laws states may pass relating to airlines’ operations. The rabbi argued that the airline did not act in good faith in the way its frequent flyer programs were structured and thus was subject to state contract laws governing good faith business practices.

In its defense, the airline stated the rabbi complained 24 times in a 7-month period, and that before forfeited his account and kicked him out of the program, it awarded him $1,925 in travel credit vouchers, 78,500 bonus miles, a voucher for his son and $491 in cash reimbursements

With a unanimous vote, the Supreme Court ruled the Rabbi could not pursue his claims against the airline because the federal Airline Deregulation Act barred his lawsuit. In its decision the court didn’t address the rabbi’s claim that the restrictions placed on his mileage account violated good faith business practices, but rather ruled that Northwest’s frequent flyer program was included in the price, route or service the airlines provide which the regulation laws were intended to protect and thus his lawsuit could not go forward.

Although the Supreme Court ultimately ruled the lawsuit could not go forward, it seems that the prior decision by the 9th U.S. Circuit Court of Appeals allowing the ‘good faith’ portion of the suit to go forward, opens the door to a lawsuit against credit card companies whose practices aren’t related by and have no impact on the airline regulation law.

If you think about it, restricting the rights to miles and points’ one earns through purchasing and credit card usage doesn’t seem to be a good faith business practice. If one was to open a bank account which offered an interest rate, the interest money earned doesn’t belong to the bank, it belongs to account holder. And with credit cards that offer cash-back rewards, once the cash is earned, the credit card company cannot restrict the way you use the cash and claim it belongs to them.

The Federal Government has chosen to keep out of the credit card reward industry. The only regulated portion of the rewards industry pertains to the status of the miles and points one earns in relation to filing taxes. In 2002, the IRS announced that it would not pursue the question of whether frequent flyer miles, and rewards and other promotional discounts awarded by credit card companies to cardholders are considered taxable income. More recently, the IRS clarified its position and stated that if individuals received their credit card rewards after a purchase, the rewards are considered rebates on whatever was spent to earn those rewards and do not represent a gain on income or wealth and are thus not taxable. However, if no transaction is required to earn the rewards, then the IRS considers these rewards as income and individuals would be required to disclose them on their tax returns.

The bottom line is as follows; until the Federal Government regulates the rewards industry and until the courts determine whether the restrictions placed on rewards violate good faith business practices, (which in fact may be the conduit where the Federal Government to take a closer look at the rewards industry and regulates the market), the miles and points you earn can be restricted. The airlines and credit card companies can determine when, how and if you can use them, what their value is, and restrict them indefinitely because, when-all-is-said-and-done, they never belonged to you in the first place!