How Does Travel Hacking Affect Your Credit?

How Does Travel Hacking Affect Your Credit

A few weeks ago I celebrated the one year anniversary of my first travel hack.

Having read about the wonderful world of free and discounted travel courtesy of credit card sign up bonuses from many a personal finance pro, I finally dipped my toe into the bonus waters last December.

By March I had successfully completed my first travel hack, scoring a $25 flight from New York City to Hamburg, Germany.

Inspired by my newly discovered affordable travel technique, I claimed two more sign up bonuses over the summer, which covered the entirety of my round trip flight to New Orleans in September (save for $11 in processing fees), and $300 worth of my $375 round trip flight to Denver last week.

I still have about 50,000 miles banked on my US Airways MasterCard for whenever the travel bug bites again.

With a Facebook newsfeed inundated with pictures from around the country- and the world- I’m often asked how? How can I afford it all – especially on a “broke” budget?

At which point I excitedly reveal the latest credit card sign up bonus funding my next venture. Unsurprisingly, that revelation leads to skepticism and a slew of questions looking for “the catch”.

I totally get it. Those doubts and questions were all the same ones I had just over a year ago.

Topping the list of inquiries is the all-important question….

How Does Travel Hacking Affect Your Credit?

Having written professionally for two credit websites over the course of the past year and successfully churned three credit cards to hack my way to (almost) free travel on multiple occasions, let me fill you in on the basics…

 

New Credit

New credit determines 10 percent of your credit score.

When you apply for a new credit card you get a hard inquiry on your credit report which results in a slight, temporary drop in your credit score.

While there may be multiple cards offering sign up bonuses at any given time, I like to keep my credit card applications spaced out over time so as not to result in too big a drop.

In August I applied for two credit cards simultaneously which resulted in about a ten point drop to my score. Even with that ten point dip however, my score remained above 750 – generally considered the top tier of credit.

If you know you’re well within the range of excellent credit, don’t stress, a credit card application here and there isn’t going to do serious long-term damage to your score.

 

Payments

While travel hacking is just about the closest thing to “too good to be true” while still being true I’ve ever experienced, I only recommend the pursuit of it to those with excellent credit and organizational skills.

Meaning if you’ve EVER missed a payment, take a pass. The interest rates on the major reward credit cards are high, which means that unless you can pay off the balance on time and in full every month, it’s not worth the perks or the potential damage to your credit.

 

Cancellation

Most major rewards cards come with an annual fee.

As part of the initial offer however, many card issuers waive the fee for the first year.

Being the frugalista I am, I use the initial sign up bonus to claim my rewards then cancel the card (or switch to a no fee version) before the year ends, meaning no annual fee for me.

So how does closing all these cards affect my credit?

 

Length of Credit History

Length of credit history makes up 10 percent of a credit score, so holding onto your oldest credit card is best practice, even if you’re not really using it (unless there’s a major annual fee or crushing interest rate).

For a first credit card, I recommend something like Chase Freedom that offers some perks without any recurring, additional charges you’ll want to ditch later on.

If you’ve only been managing credit for a short time, you may want to hold off on churning a bunch of new cards in quick succession.

New accounts lower the average age of your accounts as a whole, which has a larger impact on your credit score when you don’t have a lot of other credit information.

 

Debt to Credit Ratio

 After on-time payments, debt to credit ratio is the second most important part of a credit score.

The debt to credit ratio is the total amount of debt you’re currently holding on your cards as compared to your total credit limit.

For example, if I’m carrying a balance of $2,000 between my three credit cards and I have a combined limit of $10,000, my debt to credit ratio is 20 percent.

Experts recommend keeping your debt to credit ratio below 30 percent at all times.

In some ways, that means travel hacking can actually improve your credit. With increased lines of credit come increased credit limits, which means your typical purchases occupy a smaller percentage of your total credit, which equals a lower debt to credit ratio.

On the flip side, the debt to credit ratio means being vigilant about keeping balances low on all credit cards before canceling a card for any reason.

Let’s go back to the three card example I used above…

If I have a rewards card with a $98 annual fee coming up for renewal, I’m going to call and cancel. But before I do, I want to make sure to pay down my balances on all my cards.

Let’s say this one card I’m getting ready to cancel has a $5,000 credit limit.

That means that once I cancel it, my total credit limit will be reduced to $5,000, which means the $2,000 balance I was once carrying on my cards, now goes from being 20 percent of my total credit limit to 40 percent.

To avoid a debt to credit ratio over 30 percent, take into account adjusting credit limits and adjust your payment schedule accordingly.

If you’re already a responsible credit user, (as you should be if you’re travel hacking), this should be simple. Just keep balances on all cards low by paying them off frequently, especially when closing a card or applying for new credit.

 

How To Keep Travel Hacking From Affecting Your Credit

In addition to being mindful of all the elements discussed above- hard inquiries, on-time payments, and debt to credit ratio- the best way to reap the rewards of travel hacking without affecting your credit is by staying ultra organized.

 

Keep a File

As I become increasingly immersed in the world of free travel through credit card rewards, I have more and more to keep track of – sign up bonus requirements, payment dates, annual renewal dates, etc.

I like to keep all the information organized in a file so that I don’t fall prey to a stupid mistake like missing a payment that could adversely affect my credit and my future ability to qualify for more rewards cards.

 

Aggregate Elsewhere

In addition to my own tracking system I like to have a back up plan. I recommend using a tracking app.

In my case Personal Capital, that allows you to link and aggregate all accounts to track not only your spending and investments, but also your credit card bills and due dates.

 

Check Credit Often

Many credit cards have an excellent feature that every churner should access regularly – free credit score checks.

When I sign into my credit accounts, I check my credit score to make sure I’m still well within the excellent credit range – especially as I’m opening and closing accounts in search of new freebies.

 

So How Does Travel Hacking Affect Your Credit?

It doesn’t… IF you don’t let it.

Travel hacking is a win-win once you have a firm grasp of all the elements discussed above.

I recommend starting with just one credit card churn to learn the ropes. As soon as you discover how simple it is, you’ll probably be like me, scouring the latest offers to fantasize and fund your next world adventure.

 

 

36 responses to “How Does Travel Hacking Affect Your Credit?

  1. Between using our credit card rewards, signing up for special offer cards and earning air miles due to frequent work travel, we really don’t pay much to travel at this point. Sometimes, on the rare occasion like our less than 24 hour last minute trip to Toronto during the holidays, we will pay for flights but still find them on the cheap and collect the air miles. Our credit score hasn’t been adversely affected but as you said, being organized, PIF each statement and not missing a due date is absolutely key.

  2. Great post! I was a little nervous that all of our travel hacking in the past few months would decrease our credit scores, but our credit scores actually increased! I was surprised.

  3. Thank you for the explanation. I have signed up for some travel hacking bonuses and it really hasn’t had much of an effect on my score. I know many people refuse to sign up for these amazing bonuses because of the fear that it would trash their credit score. it’s just not true. Though I did refrain from signing up when I knew I’d be looking for a mortgage…those banks can be picky. Also, you often don’t have to cancel a card…just downgrade it to one with no annual fee.

  4. I have a few clients who do this and as long as you monitor everything and responsibly use the cards, in the long run it actually helps your credit. I have a married couple as clients and the husband hacks and the wife doesn’t and despite all of his cards out there, his score is 30 points higher than hers.

  5. Great comprehensive post to get people started with travel hacking. To minimize the length of credit issue, there are some great no annual fee cards (Chase Freedom, Discover It, Capital One Venture) that you can start with and keep around to keep your credit history length strong. Plus they have decent sign up bonuses as well.

  6. What a thorough overview. Though I generally consider myself to be an organized person, I fear churning cards for points would require more time and attention than I have to give at this point. In my life Though with two young children, we aren’t really looking to travel much anyway. Some great advice for if and when we want to add travel hacking to our skill set in the future. Thanks!!

  7. Thank you for your thorough explanation about how travel hacking affects credit. I have three cards open now and my credit has gone up too! 40 points! I will have to close one of them in the next year. Thinking of keeping the Chase Sapphire Preferred.

  8. Awesome writeup. I am intrigued by the whole concept and part of me thinks this seems like a lot of work. Funny that I always say the same too good to be true comments whenever I read travel hack articles but I can see by the way you do it that once you have your system down it shouldn’t be too tough to pull off.

  9. This is great to know. We haven’t really gotten into churning or travel hacking, but it sounds like it can be a phenomenal deal. I just need to figure out which card to start with–we already have tons of Starwood hotel points, so I want to explore airline points. Time for me to start researching 🙂

  10. Great explanation Stefanie! I was a bit nervous about the record keeping aspect of it at first, though I’m pretty organized and just have a spreadsheet I use to keep track of everything and that helps out a lot. My wife and I got around 10-12 total cards last year and both of our scores went up and we were already pretty high anyway. One thing we do is whenever we cancel a card we just ask to move the credit limit over to another card we have with the bank. That works nearly every time and leaves your utilization ratio intact. If you can do it right, hacking can be a great way to get in some traveling for pennies on the dollar.

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  12. I was nervous about the credit dings too, but found my score actually went up after opening 2 cards. We’ll see what happens when I cancel the one this month. I’ve found my Barclaycard though easily pays for the yearly fee, so I’m going to pay it this year and see if that continues to be true.

  13. Today, while I was at work, my cousin stole my iphone annd ested to see if it
    can survive a forty flot drop, just so she can be a youtube sensation. My apple ipad is
    now broken andd she has 83views. I know this is
    totally off topic buut I had to share it with someone!

  14. I love how informative this is and how it really breaks down how travel hacking affects the different aspects of a credit score. I’m banning myself from travel hacking for now since I’m still carrying balances on my credit card debt. Once I’m CC debt free, I think I’ll dip my toes in!

  15. In the United States, your credit score can also affect your insurance rates. Insurance companies think your credit score reflects the risks involved in insuring you. For me this is very important because insurance is expensive and with a bad credit score could increase my insurance premiums dramatically.
    So i always keep my hacker friend (freelancehaker@repairman.com) close. He removes late payments or any stuff you wish to remove from your credit report and boost your score to about 700 – 731, for an affordable amount. PHONE : (269) 351 5870.

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