Shang’s note: Today’s introductory travel hacking post is written by none other than my fabulous assistant, Megan Nolan! I’m so excited to have had Megan been a part of my team since February, I am so grateful of all the growth she has helped with.
Opening a travel hacking credit card impacts your credit just like opening a cash back credit card. However, many people overestimate just how much of an impact this is.
Your credit score, which is most commonly measured by FICO, is made up of the following factors:
- Payment history (35%)
- How much you owe / credit utilization (30%)
- Length of your credit history (15%)
- New credit (10%)
- Your credit mix (10%)
Having a payment history provides more information about your spending habits. Late payments, charge-offs, debt collections and bankruptcies all affect your payment history. It’s extremely influential to pay your credit card bills in full and on time in order for lenders to consider you for new credit. The amount of your credit limit you use is called credit utilization; experts recommend using no more than 30% of your available credit. Your credit history includes the age of your oldest credit account, the age of your newest credit account, and the average of all your credit accounts. The longer you’ve had credit, the better – so keep old accounts open unless there is a compelling reason to close them, such as an annual fee on a card you no longer use. New credit can help boost your score, but don’t get carried away! Each credit application that causes a hard inquiry on your credit may take a few points off your score. This can also flag you as being too risky of a borrower if you try to open multiple credit cards in a short amount of time. People with top credit scores often carry a diverse mix of credit accounts, which might include a credit card, car loan, student loan, a mortgage or other credit products. Your credit mix indicates the borrower can handle all sorts of credit.
A hard inquiry associated with a credit card sign up, which is when a lender asks for a full copy of your credit file in order to issue you more credit, typically lowers your score by 5 points or less. While you may experience a temporary small dip in your credit score, signing up for a credit card can help your credit in the long run if you manage it responsibly.
Since new credit is a smaller part of the components. New credit card accounts will have a much smaller effect than a truly negative credit report item, like a missed payment or a maxed-out card. Please remember to pay your credit card balance in full when it’s due! Set an alarm on your phone, have your bank send you a notification; whatever it takes! Please don’t apply for any credit cards if you can’t manage your credit card spending responsibly.
It’s good to be strategic about opening new credit card accounts. Technically, you can apply for new credit cards as often as you’d like – that’s right, there is no limit – but waiting between credit card applications, or doing them all around the same time, can improve your chances of getting accepted. Since your credit score takes a hit every time you submit a credit card application, it’s not recommended to apply to multiple card applications in a single day. A rule of thumb is to wait at least 90 days between credit card applications; waiting a full 6 months is even better. This will help protect your credit score from too many negative inquiries. Also, credit card companies can set rules on how often you can be approved. Each financial institution has its own rules that are typically designed to limit credit card losses for the bank. These rules are tough for consumers because they’re not always published. Some consumers will go apply for a card and get denied and that will sometimes result in a hard pull on their credit report.
Follow me at @savemycents on Instagram and @savemycentsfb on Facebook for tips on hacking travel costs, credit scores, and all things personal finance.
