Are you ready for your Travel Hacking Economics Class? (collective groans, I know.)
I promise it won’t be that bad!
There are a ton of questions out there about travel hacking. Credit cards and what they may or may not do to your credit score are always a big part of what beginners and skeptics alike want to know.
In this post, let’s address some of these credit card myths, as well as look at credit card best practices, and even whether or not travel hacking is right for you.
Create your own travel hacking Pinterest board and keep all your resources in one place!
At the bottom of this post, you’ll find your tasks and the resources you’ll need to complete them. Remember to reach out if you have questions. Leave a comment below!
The Ultimate Guide to Travel Hacking: Credit Cards Part 1
Step 1- What do you know about how your credit score is calculated?
Let’s first consider the results of a study commissioned by The Points Guy in early 2015, in which Americans were surveyed about what they knew about travel rewards credit cards.
- A mere 1/3 of people answered yes when asked if they had a credit card that earned miles and points. Just 10% said they had 2 or more travel rewards credit cards.
- 1/3 of the people with travel rewards credit cards had no idea if their card came with foreign transaction fees or not.
- Nearly 3/4 of the survey participants said they never checked with banks to learn about the latest or the most lucrative sign-up offers.
It’s not entirely clear why the majority of Americans are so in the dark about travel rewards credit cards. However, there seems to be a lot of myths and misunderstandings surrounding credit scores, credit cards, and how the two impact one another. This misinformation and the concern over whether you’re making a good or bad credit decision are enough to stop many people from taking advantage of the incredible travel rewards that are out there.
You don’t have to be one of these people. You can take that BIG trip without saving money for years and years!
1. Watch this 2-minute video below to get an understanding of what goes into your credit score.
2. Let’s debunk the most common credit score myths.
Won’t too many credit cards hurt my credit score?
No. The number of credit cards you have does not hurt your credit score. In fact, if you’re responsible with your credit cards and pay your bills off on time each month, your credit score is likely to improve.
Credit scores reflect how much of your available credit is in use. If you have 1 credit card with a $5,000 limit and $2,500 of that is a balance you’re carrying, then 50% of your available credit is in use. Compare this with someone who has 4 credit cards for a total $25,000 spending limit and the same $2,500 balance. Only 10% of the credit available is in use. People who use less than 30% of their available credit are considered low-risk. As a result, their credit score goes up.
Ok, but won’t applying for all those credit cards hurt my credit score?
How long your accounts have been open counts for 10% of your credit score. With each new account, the average age of your accounts gets younger. This can cause anywhere between a 2-10 point TEMPORARY dip. Remember you’ll also have more credit available to you so the percentage of how much of your credit is in use will go down and your credit score will go back up and just might even improve!
Shouldn’t I carry a balance to improve my credit?
No. The less debt you have the higher your credit score will be. The lower that in use percentage is from above the better it will be for your credit score. From a travel hacking perspective, paying high interest on balances cancels out the value of the miles and points you’re earning.
Debit cards are better than credit cards for your credit score, though, right?
Absolutely not! Debit cards aren’t tracked on your credit report. Not to mention, your money isn’t working for you. You’re in an earning money and paying bills cycle with no reward. If you’re responsible about spending and paying off the balance each month, put your debit card away and use your credit card for bills and everyday spending.
I’ll never have a good credit score because I don’t make a lot of money.
The amount of money you make has nothing to do with your credit score. As long as you spend within your means and pay your bills off each month, your credit score will positively reflect that no matter how much your paycheck is each week. There’s a teacher writing this and we all know that teachers don’t make a whole lot. At last check, my credit score was an excellent 812!
3. Find out your credit score. Complete the Money Habits Inventory.
- What is your credit score? If you don’t have a credit card that gives you access to your credit score, you can use Annual Credit Report to get your credit score free once every 12 months or a service like Experian where for $1 you can check your FICO 8 score.
- Are you a saver or a spender? How many (if any) credit cards do you have? How long have you had each account? Do you pay your bills on time? What are (if any) the amounts owed on each one?
Download the PDF below to complete the Money Habits Inventory.
Step 2- What are credit card best practices for travel hacking?
Use your travel rewards credit cards for everything. By everything I mean, everything you have to buy or pay that accepts credit cards. From your cable bill to car insurance to doctor’s office co-pays to Netflix and your morning coffee, pay with your travel rewards credit card. You get no return paying your bills and buying groceries with money directly from your checking/savings account. Put your debit card away and make your money work for you every time you use your travel rewards card!
Spend smarter, not more. Use your travel rewards credit card for the same things that would’ve normally come out of your bank account or been purchased with a debit card. Do not spend more than you can pay off at the end of each month!
Pay your monthly balances in full. Travel rewards credit cards typically come with high-interest rates. If you carry balances, the amount you’ll pay in interest fees will cancel out the value from the miles and points you’re earning.
Keep no annual fee credit cards open forever. Remember the older the age of your accounts, the better your credit score will be. You can selectively use these cards without worrying whether or not there’s value in paying the annual fee.
Apply for new credit cards wisely. Of course, you want to take advantage of large sign-up bonuses. Be sure your budget allows for the minimum spend to earn that bonus. There’s no point in applying for 2 credit cards if you can’t earn the bonuses. Some travel hackers apply for 2-3 cards at a time with 3-4 months in between each round of applications. Others prefer to target specific cards or wait for higher than usual sign-up bonuses. Do what’s right for you, your finances, and your travel goal.
Close credit cards strategically. Keep credit cards open for at least 10 months. You’ve either paid the annual fee for the year or it was waived. Either way, the longer the account is open the better it will be for your credit score. Before you cancel a card, always call the bank to see if a no annual fee version exists and if you can downgrade your card instead of closing the line of credit. If you decide to cancel a card, do it right after you’re approved for any new cards.
Pin the infographic at the bottom of the post with these credit card best practices and use the Google spreadsheet below to track your credit card accounts.
Step 3- Is travel hacking right for me?
We can dive into the specifics of different kinds of credit cards, the credit cards every beginner should start with, ways to meet minimum spend requirements, and annual fees. BUT before you continue, think about what we’ve discussed so far and decide whether travel hacking is right for you. What I mean is:
Can you responsibly handle the power that comes with having multiple credit cards?
- Do you spend within your means?
- Do you pay your bills on time and in full?
If these answers are no, you’ll be better off saving money over time to pay for the vacation you want to take. Don’t ruin your credit by applying for credit cards you can’t handle properly.
You should also consider these two points carefully.
- If you’re applying for a loan, like for a mortgage, a car, or college tuition, finish this process first before applying for any credit cards.
- If your credit score is under 700, it will be difficult for you to be approved for travel rewards credit cards. Work to bring up your credit score before applying for any. With Experian Boost, you can increase your FICO® score. Boost is a completely free tool with no credit card required that can instantly improve your credit score by factoring your mobile phone and utility bills.
- In the meanwhile, earn miles and points with shopping portals and dining programs .
- Check your credit score using Annual Credit Report or with another service of your choosing.
- Download and complete the Money Habits Inventory.
- Use the link to the Google Spreadsheet to organize the credit cards you have and are applying for.
- Pin the Credit Card Best Practices for Travel Hacking to your Travel Hacking Pinterest Board.
Google Sheets Credit Card Tracker – Open the document. Click on File, then make a copy for yourself!
Start a travel hacking Pinterest board to keep all your resources in one place!
What credit card myths do you have? Do you already travel hack? What tips can you offer for beginners about credit cards?
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