Here we are again for the next installment in our Travel Hacking 101 Series. If you’re new here, these are the previous posts on this topic:
- Travel Hacking 101: What is Travel Hacking?
- Travel Hacking 101: How Does Travel Hacking Work?
- Travel Hacking 101: Airline and Loyalty Programs
- Travel Hacking 101: Types of Rewards Programs
When most people begin to grasp the world of churning credit cards to receive lucrative sign up bonuses they immediately fear that their credit score will take a hit. 10/10 this is ALWAYS the first rebuttal question: BUT WHAT ABOUT YOUR CREDIT SCORE?!?
So today, we are going to focus on the topic of credit.
Credit Card Warnings
This section is focused on useful information you should know before applying for any credit cards, in particular warnings of what not to do.
We’re very lucky to be able to still apply for US based credit cards where large sign-up bonuses are common. One or two well chosen credit cards can get you flights around the US or abroad for a fraction of the cost. But applying for credit cards without knowing what you’re getting into is a recipe for disaster. Banks don’t exist to hand out miles and points. They exist to make money, lots of it, and at your expense.
- APPLYING FOR TOO MANY CARDS
- As tempting as it may sound, if you are new to miles and points, you should hold off on applying for 6 cards at once to fly around the world and stay at luxurious hotels. You must be detail-oriented and able to track minimum spending deadlines, payment due dates, the date the card was opened, the credit limit on the card, the remainder left until meeting spend requirement, etc. I recommend creating an excel spreadsheet to keep track of everything! Slow and steady wins the race here, start with 1 card to dip your feet in the water and see if you can be organized. If not, chances are you will negatively affect your credit and this is not for you!
- Are you able to meet the minimum spending comfortably? Do you avoid the temptation to spend more than you normally would, just to get a sign-on bonus? Do you pay your balance in FULL and on-time?
- If the answer to any of these questions is “no,” you should NOT apply for miles and points credit cards.
- NOT PAYING YOUR BALANCE OFF IN FULL EACH MONTH
- Most miles and points cards charge higher rates of interest than other cards (aka how banks make money). This game is NOT for you if you can’t pay your credit card balance in full each month. Don’t apply for miles and points cards if you only pay the minimum amount or less than the full balance due. You will never get ahead in life by constantly paying high rates of interest on credit card debt.
- SPENDING MORE
- It is tempting to spend more than what you normally would just to meet the minimum spending needed for a credit card sign-up bonus. Don’t get caught in this trap. Keep a budget and stick to it. Plan out the minimum spending requirements BEFORE you apply for credit cards cards. Calculate how much you normally spend in a month and then calculate the minimum spending requirements and see if it’s actually feasible or not.
- YOUR CREDIT SCORE MATTERS
- Your credit score determines the interest rate banks will charge to pay back debt (this can be from a credit card, a home mortgage, new car, etc.) and it will also helps banks determine if you will get approved for a card or not. You shouldn’t be playing this game if you have a credit score of ~700 or lower on the FICO scale. Improve your credit score and the offers will still be there for you.
- Obviously a score of 650 is better than a score of 550, and a score of 750+ will get you access to lower interest rates than a score of 650. But after a score of ~760, you don’t necessarily get a lower interest rate for having a higher credit score and you likely will get approved for most applications out there. And really, this should be a mute point as you’re paying your balance in full each month.
- BUYING A HOUSE OR OTHER LARGE PURCHASE
- Buying a home is likely the single largest purchase in your life. And it will bring you far more happiness than applying for a few credit cards. Credit inquiries stay on your credit report for 2 years and lenders will review your credit report when you apply for a house loan. This could impact the interest rate on your mortgage as well as if banks are willing to trust you with a mortgage loan.
- The forums and blogs are filled with comments from folks who’ve managed to get house loans despite applying for lots of credit cards. Good for them. But I prefer to be more cautious.
- I don’t want to risk anything that would either cost me more in interest or not get me approved for a loan. As a suggestion, I’d feel comfortable applying for 2 cards two years out from a home purchase and avoid them completely during the year I plan to buy a home.
Understanding Your Credit Score
Banks want to see a potential lender who regularly pays the interest and reduces the principal. Credit cards can be a good indicator of whether the potential lender can service the debt he or she is requesting. But credit cards are just one part of your overall credit rating. If you have taken a student loan, car loan, furniture loan, house loan, etc., these will also be part of your credit report. If you paid down these loans in timely fashion, this will count in your favor. A stable income is also a key factor for deciding whether you qualify for a loan. FICO® Scores can be as low as 300 and as high as 850 and are calculated from many different pieces of credit data in your credit report. This data is grouped into five categories as outlined below. The percentages in the chart reflect how important each of the categories is in determining how your FICO Scores are calculated. Late payments will lower your FICO Scores, but establishing or re-establishing a good track record of making payments on time will raise your score.
How a FICO Score breaks down
These percentages are based on the importance of the five categories for the general population. For particular groups—for example, people who have not been using credit long—the relative importance of these categories may be different. You can check your current credit score using Credit Karma (or google a similar site).
How Credit Cards Affect Your Credit
Credit cards affect your credit score in several ways according to FICO, which produces the most widely-used credit score in the United States. Sorry Canadians, I hardly know anything about the credit system up here as I continue hold the majority of my cards/knowledge in the US market but I presume it is all very similar.
1. Making on time payments raises your credit score. And this, the “payment history”, is the most important part of your credit score.
The net result of opening dozens of cards and having close to 10 open at the moment is a credit score in the 800s for me.
Skipping payments or paying your credit card late can quickly damage your credit score. And it can take up to seven years to get a hit, ten years for certain items, off of your record. If you pay all of your bills and credit card balances in full and on time, your history will remain clean, resulting in a much higher score.
2. Getting the new credit line that comes with a new credit card raises your credit score. Why? Your credit utilization ratio of debt-to-credit-line gets lower (which is good) when you open a new card – but don’t spend more money per month on your cards. This is what the “amounts owed” category means in the chart above. For example let’s say you spend $2,000/month on your credit card and you currently have 1 credit card with a $5,000 line of credit. Your credit utilization ratio is 2,000/5,000 or 40%. If you apply for a second card, also with a $5,000 line of credit, and continue to spend that same $2,000/month your credit utilization ration is 2,00/(5,000+5,000) or 20%. A lower ratio makes you look more responsible in the banks eyes and they feel more comfortable lending you money. Carrying high balances, relative to the total credit limit, on several cards could indicate a greater risk of default and bring down your score.
It’s worth pausing right here as these two components make up the majority of your credit score. Pay your card in full and on time and don’t spend up to the max.
3. The “length of credit history” means how long any given account has been reported open. Generally, the longer the account has been open and active, the better it is for the credit score. This is why I have a few no annual fee cards in the mix to just hold on to under my bed so that the average age of my cards is a good mix of the ones I’m churning which I only keep open for ~1 year combined with the 10+ year old cards which help keep the average age well above the 1 year mark.
4. “Credit mix” refers to the different types of credit accounts you have – mortgages, loans, credit cards, etc. I’ve heard many people say that they want to slowly pay down their student loans or mortgage so the loan always remains a part of their credit mix. But in reality, this factors so little into your overall credit score. To each their own but there’s no way that would be a leading reason for me to ever hold onto debt.
5. Applying for a credit card hurts your credit score. This is the “new credit” category which only accounts for 10% of your score. Yet this is the category that always brings on the most concern. In my experience, my score drops 2-7 points per hard credit pull. That’s not likely to change your life or your ability to get credit, and within a few months the ding goes away on its own and you’re back to your normal credit score.
Closing Thoughts
Many people assume that opening multiple cards throughout the year, year-after-year, will negatively impact their credit score. When in reality, as long as you diligently pay off your credit card balance in full each and every month and spend much less than the amount of credit the banks are providing you, you’ll be smooth sailing to boosting up your credit score – regardless of how many cards you have open. Sure you may see your card dip a few points for a few weeks after opening a new card, but your score will recover back as you continue to make those monthly payments. Both Nic and I have credits scores over 820 in both the US and Canada and we have been travel hacking for 10+ years.
Were you under the impression that signing up for multiple cards would ruin/hurt your credit? Hopefully we are making you more and more comfortable to take the plunge into the world of travel hacking!
Support This Blog
If you liked this article and want more content like this, please support this blog by sharing it. Not only does it help spread the FIRE, but it lets me know what content you find beneficial. Writing is NOT my strong suit and it honestly takes me hours to write each post so the more encouragement the better! Engaging in the comments below keeps me motivated. You can also support this blog by subscribing to receive emails anytime a new post is published. Thank you FImily!
We believe in stacking up life hacks to keep your enjoyment levels to the max without depleting your bank account. Here are some ways to further educate yourself and save thousands of dollars over your lifetime by making some simple adjustments:
- Investing Newbies: Check out our free Investing 101 Series
- How much are you paying for your phone plan? Canadians, learn more about Public Mobile and see how we are paying $3 / mo for our cell phone plan.
- How much are you paying for internet? Canadians, learn more about the various Independent Service Providers out there to see who services your area so you can lower your monthly bills.
- How much are you paying for home insurance? We were able to reduce our rates by 25% by switching over to Square One Insurance. If you live in BC, AB, SK, MB, and ON, check out Square One for your home insurance, landlord insurance, and / or tenant insurance.
It’s amazing just how important credit card scores are. The worse part is that it takes a forever and a half to actually get to a decent credit score.
Lenders make sure to make the process as hard as possible for credit card holders to improve their scores month over month and that shouldn’t be the case!
Sad but true David! I personally think it carries too much weight and some people seem more concerned with their credit score than their net worth!