Here's how to find the credit card you need to enjoy your free vacation

New York: Many frequent fliers are buzzing about the latest travel rewards credit card — one that comes with a hefty $450 annual fee but offers a juicy 100,000 point bonus at sign-up.

Rewards cards lure us in with dreams of a free trip to some warm tropical beach. You're going to spend money — why not get a vacation out of it.

The truth is, these cards make sense only for those who spend lots of money, and quickly. The better value for most travelers — especially those flying domestic coach — is a cash back credit card.

There are a number of factors to consider when choosing a credit card. First, a major caveat: None of these cards — rewards or cash back — make sense unless you pay your bill in full each month. If you don't, any rewards earned will be washed away by interest payments.

Cash vs points

The beauty of cash is that there are no restrictions. Forget desperately hoping that the airline opens up enough mileage seats on the flight you want. Or worse, locking yourself into one airline — just because you have miles — that requires a connection when there is a cheap, nonstop flight on another carrier.

The Citi Double Cash card and the Fidelity Rewards Visa Signature Card both offer 2 percent cash back on all spending.
Why is this better than frequent flier miles?

A typical domestic roundtrip ticket costs 25,000 miles on American Airlines, Delta Air Lines and United Airlines.
Having a credit card with one of those airlines earns you one mile for every dollar spent — more for purchases with the airline. That means you would have to spend about $25,000 on a credit card to get a free ticket.

That same $25,000 spent on a cash-back card would earn you $500. The average domestic roundtrip ticket last year cost $363.98

If you charge less than $25,000 a year, cash back makes even more sense. You might only earn $150 or $200 in rewards a year. But you can stash that money away to pay for part of your next flight instead of hoping to eventually have enough miles for that trip.

Annual fees

There are cards with higher cash back rates in certain categories as well as many travel cards but they come with sometimes steep annual fees. For many families, that fee can wipe away any savings.

Let's compare a no-fee, 2-percent cash-back card with a card that has a $95 annual fee. It takes $4,750 in charges on that 2-percent cash-back credit card just to earn $95 in rebates. If you are earning miles or some other currency with that annual fee card, your first $5,000 in charges basically cover the fee. For somebody who charges $80,000 a year, that might not be an issue. But for somebody charging $10,000, they are paying a fee and won't even get enough miles for a free trip.

But don't necessarily dismiss a card just because it carries an annual fee. Most of the major airline credit cards offer free checked bags for the primary cardholder and some of the people traveling with them — as long as everybody is on the same reservation. Since checking a bag typically costs $25 — each way — that $95 annual fee could pay for itself if three bags are checked roundtrip a year. You don't even have to make other charges on the card, sticking to your cash-back card for everyday spending.

Amtrak's credit card, with a $79 fee, comes with a free companion ticket, potentially making it worthwhile for frequent train riders. A roundtrip ticket from Boston to New York could easily top $200.

And the IHG Rewards Club comes with a free night at any InterContinental hotel in the world for its $49 annual fee. That's anything from the fanciest InterContinental down to a Holiday Inn Express next to the highway.

Signup bonus

Finally, there are those eye-popping signup bonuses. The Chase Sapphire Reserve Card made headlines recently for its 100,000 point signup bonus after spending $4,000. Those points can be worth up to $1,500 in travel rewards. It carries a $450 annual fee but $300 of that is refunded for spending on travel.

Other cards routinely offer anywhere between 30,000 to 50,000 miles in signup bonuses. So, if you have good credit and can meet the minimum spend within the short time period, you can quickly pad your frequent flier balances.

In other words: get the card for the signup bonus and then cancel it before the next annual fee hits. Just be warned, credit card companies are starting to cap the number of cards you can have and are putting lifetime limits on signup bonuses.