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In the last lesson, I covered how you should align your How of Travel with your Why of Travel, and then looked at a few examples to demonstrate that travel rewards (when used responsibly, of course) really can earn you free, or at least almost-free, travel.
Now that you have seen the potential power of travel rewards, it’s time to dive a little deeper into how the whole system works.
If you cut up your credit card or stick it in the freezer because you can’t control your spending, or if you are not able to pay off your credit card statements in full, on time, every time, this is not for you.
Using credit cards irresponsibly can set your financial freedom clock back by years. We’ll always be here to help you get started with travel rewards when you’re ready, so take your time to get your basic finances in shape first.
Crush high-interest debt. Build up your emergency fund. Nurture your credit score. Do all these things first, and you’ll find travel rewards a great tool to enjoy your FI journey while spending less.
Still with us? Great! Now let’s take a look at how all of this is possible.
Credit card companies buy miles from airlines and points from hotels, and then repackage them as "signup bonuses" or “rewards” to entice people to use their travel rewards credit cards, and presumably, to form an addictive habit of using that card for all purchases going forward.
However, in the FI community, we optimize and approach everything with intentionality, right? So, we’ll use credit cards if and when they serve us best.
The whole idea is to earn these signup bonuses by spending money you were already going to spend anyway, and to be intentional about what method (in this case a targeted credit card) you use to pay for that expenditure. If this sounds confusing, we’ll get to that in a future lesson.
But for now, know that if you actually spent extra money just to earn a signup bonus, that kind of defeats the purpose. It isn’t “nearly free travel” if you’re increasing your monthly expenses to buy stuff you don’t need, just to hit a spending requirement for a signup bonus.
The most common concern we’ve heard from folks who are new to travel rewards is whether opening new credit cards every few months will affect their credit score.
In the short term, yes, it may cause the score to dip slightly. So, if you are going to be applying for a major loan, like for a home or car, consider holding off on applying for new credit cards for at least 12-18 months prior.
But over time, your credit score may actually go up if you use your credit cards responsibly.
Many banks currently give you your credit score for free directly from at least one of the three credit reporting agencies: TransUnion, Experian, and Equifax.
If your bank does not provide you this information, you could also get an approximation of your score with a free account at Credit Sesame or Credit Karma.
In general, you’ll need a score of at least 700 to get approved for the high-value travel rewards cards banks offer, but this can vary between issuers. Additional factors from your application and credit history might also be considered.
It’s generally a good idea to check your actual credit report every few months to make sure there isn’t any unauthorized activity there.
If you enjoy free travel, it’s especially important to check your credit report so you know just how many cards you have open, and for how long.
This knowledge will empower you by helping you decide which credit cards to apply for, and when to apply for them so that you maximize the odds of approvals.
Each of the credit reporting agencies has to give you a free copy of your credit report once a year. So if you space out your requests, you’ll get a free report every four months.
You can get your free annual reports here, but beware of look-a-like sites trying to trick you into revealing your social security information. Always verify with the Consumer Financial Protection Bureau that the free credit reporting service you are using is above board.
Starting Sep 21, 2018, you can freeze your credit file with each of the three credit reporting agencies for free.
This makes it harder for someone to open a new account in your name, because during a freeze, businesses cannot request your credit file unless you unfreeze it using your security credentials.
You will have to contact each agency separately to request a freeze. Here are the links to each of the three agencies:
Once your credit is frozen, you will need to call the agencies to lift the freeze at least an hour before applying for a new credit card. When you are done, remember to call back to refreeze your credit.
Don’t confuse a freeze with a lock. They do the same thing, but a lock is a paid service, whereas a freeze is free, guaranteed by federal law.
Another important way to protect your credit file is with a year-long fraud alert. This instructs businesses that check your credit to verify with you before opening a new account.
Unlike a credit freeze, which requires you to contact each agency separately, when you request for a fraud alert with one agency, that agency has to notify the other two.
Derogatory marks: One of the things that will sink your score is if you have missed a bill, defaulted on a loan, or declared bankruptcy. If you have been in any of these scenarios recently, this is likely not the time to pursue travel rewards credit cards
Credit card usage: When you have multiple accounts with a significant total credit limit, but only use a small percentage of them, you are exhibiting behavior which tells lenders you’re a responsible consumer.
This will actually give your credit score a nice bump. So the more cards you have, the more credit you will have. If you continue to limit credit usage despite having more cards and a larger line of credit, your new travel rewards credit cards will actually strengthen your score over time.
Age of credit history. Each time you get approved for a new card, the average age of your credit history gets a little smaller. Since lenders prefer a long credit history, new cards will cause your credit score to dip. Thankfully, the longer your credit history, the smaller this impact will be. So keep your oldest accounts open!
Total accounts: The more accounts you have, the better it is since it suggests that lenders think you are creditworthy. So, your score goes up a little.
Credit inquiries: The more credit inquiries you have, the more your score will drop, whether or not your application was approved. The good news is that after a few months, each inquiry will have little to no impact.
You have three actionable takeaways for this lesson:
Now that you understand the basics of getting started in travel rewards–and how important your credit is–it’s time to learn how to put all this information to use. That’s exactly what lesson three is going to be about.
If you found this course on travel rewards helpful, you may also enjoy this free illustrated guide, packed with many other ways to get more for your buck and win back your financial independence.
Course content originally produced by ChooseFI was edited/updated by CardRatings for this lesson.