How Does Travel Hacking Affect Your Credit Score?

As a result of travel hacking, I usually have about 10-15 credit cards open at any given time. The reaction I get from people is always the same.

Oh my god! Doesn’t that hurt your credit?!

The answer is no. It doesn’t. In fact, it has the opposite effect.

For full disclosure, here is a screenshot of my credit score from CreditKarma:

credit score

To understand how travel hacking affects your credit score, you first need to understand how credit scores are calculated.

credit score breakdown

There are 5 Parts to your Credit Score

  1. Payment History

    • This is the most important factor in calculating your credit score. I recommend setting up automatic payments for the full statement balance on all your credit cards. Set it and forget it.
    • If you are carrying credit card debt, travel hacking is not for you. Carrying credit card debt will always negatively outweigh any benefits you would gain from travel hacking. Debt is the enemy.
  2. Amount Owed (Credit Utilization Rate)

    • The lower the percentage of your credit line you are using, the higher your score. This is where travel hacking provides the biggest boost to your credit. With each card you open, your total credit line is increased.
    • For example, if your current credit card balance is $1,000 and the total amount of your credit lines is $10,000, you are using 10% of your total credit limit ($1,000 / $10,000). If you open a new credit card and are given a new $10,000 line of credit, your utilization rate immediately drops to 5% ($1,000 / $20,000), thus improving your credit score!
    • Always try and keep your credit line as high as possible. In travel hacking, you will often close cards just before their annual fee comes due, but you have a few options to keep your credit lines open:
      • If you have more than one card from the same bank, ask to move your credit line to the other card before closing the first one.
      • Call the number on the back of your card and tell them you’re thinking of cancelling because of the annual fee. Many times they’ll offer to waive it. Sometimes they’ll even offer additional miles on top of this!
      • Downgrade your card to a no fee version.
  3. Credit Length

    • This is based on the average age of your credit lines. What this means is that you shouldn’t close your oldest credit card account. I have an old CapitalOne card from before I had ever heard of travel hacking. The card just sits in my drawer and each year I pay the $39 annual fee, but the cost is worth it to me for the positive affect it has on my credit.
    • If your first card has an annual fee like mine, try and call the bank and see if you can downgrade/upgrade to a no fee version of the card. I haven’t had any luck with getting CapitalOne to budge on this, but I have heard of banks accommodating this request.
    • If your card doesn’t have an annual fee, you might as well keep it open even if you aren’t using it. This only helps your credit.
  4. Types of Credit

    • This one isn’t terribly important, but having a different types of credit will help your score marginally. Examples of different types of credit include credit cards, mortgages, car loans, school loans, etc. The only type of credit I have ever had is credit cards, and I maintain a score over 800.
    • It is a pet peeve of mine when I hear people suggest taking on unecessary debt in order to “build their credit.” This is total BS and completely untrue. So next time someone suggests you finance that car just so you can make payments, politely nod and remember that you know better. Debt is the enemy.
  5. New Credit (within the last 12 – 18 months)

    • This includes recently opened credit card accounts and hard pulls on your credit.
      • A hard credit pull occurs anytime your credit is pulled with the intention of giving you a new line of credit. Applying for a credit card, mortgage, loan, etc. would result in a hard pull.
      • The opposite of a hard pull is a soft pull. A soft pull has no affect on your credit score. Examples of this are you checking your own credit score on CreditKarma or opening most checking accounts.
    • You want this number to be as low as possible, but it is important to remember it is only worth ~10% of your credit score.
    • Every time you apply for a credit card, the bank will make a hard pull on your credit. This will lower your score a couple of points. However, when you are approved and given a new line of credit, it has the positive effect of lowering your credit utilization rate (see #2). Because your credit utilization rate is worth ~30% of your score, the effect on your credit score is a net gain.

Hopefully you now have a clearer picture of how your credit score is calculated and feel less hesitant about travel hacking. All that’s left to do is start racking up those miles!

 

Editorial Disclaimer: All written content on this site is for information purposes only. Opinions expressed herein are solely of the author, unless otherwise specifically cited. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

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