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 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.
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.
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.
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.