Welcome to a regular feature on the Renés Points blog. This blog series covers in a “rookie” way either a Delta or travel related theme and attempts to break down to a basic level each topic. You can read up on all the previous posts HERE. Now on to this featured topic.
I, Chris, have around 18 open credit cards in my name right now (René tells me he has 22 after getting 3 new ones approved on Monday).
I applied for all of them or gave my blessing to be an authorized user. No identity theft was involved. 🙂
Some of you will gasp and say one of two things:
1) “That’s a lot of credit cards!”
2) “Pfft! Amateur!” 😉
If you’re in group #1, you’re probably thinking, Yeah but I bet his credit score is horrible!
When talking about travel points and miles credit cards, I’m almost always asked about my credit score: what the number is, if all those credit cards hurt my score, or a number of other questions.
I frequently hear, “I’ve always wanted to get into points and miles. But I’m afraid credit cards will hurt my credit score.”
If you’re responsible and only charge what you can pay off in full each month (and never, ever pay any credit card interest EVER), then you’ll be fine in the credit and miles/points worlds. You will enjoy what I say is the best kind of “FICO”:
“Fly International, Coach Optional.” 😉
So let’s tackle a number of credit questions.
For the record: I am not a certified investment advisor or financial planner. The material below is based on research and personal experience. I am not telling you what to do.
Personal experience is how I learned a most brutal lesson.
A Cautionary Tale
My mother died when I was 24. I inherited some money — nothing huge but it changed my life – for the worse.
And that was at a time when things weren’t going well in the first place.
So what happened?
I blew through the inheritance.
Not once, but twice over!
Some people drink, do drugs, or overeat when grieving. I spent money. A lot of it. Recklessly.
I took friends to dinners, bought rounds of drinks, purchased computers and gadgets and phones, bought lots of DVDs and CDs and — honestly, I don’t really remember the rest.
I paid for all this with a combination of credit cards because I wanted to earn rewards: a Northwest WorldPerks Visa; a Discover 1% cash back card (because it was cash back, of course!); an Old Navy card (because the store was giving something away that day); a Delta Amex; some Capital One card. And others I can’t even recall. As you can see, it was bad.
Those points, miles, 1% cash back, and Old Navy store giveaway were anything but free. They cost me about $6000 on top of what I already spent.
My credit score tanked. I had about $100 in my bank accounts. I almost filed for bankruptcy — well before I was 30 years old.
A couple of family members much wiser about investments and finances loaned me money to get out of debt. It took me five years to pay back — at thousands of dollars a year. Those were years of staying in on weekends, rarely eating at restaurants, and eating lots of cheap, unhealthy food.
I learned my lessons and studied up about credit. Frankly, how credit cards work is something that should be taught in high school — before students show up on college campus and sign up for credit cards because someone is offering a free t-shirt.
I’ve since been on the strait and narrow and only spend what I can afford.
Trust me: “free” travel isn’t worth destroying your credit. Financial strife in the name of points and miles isn’t worth the stress and its effects on your body.
So with my personal pain and mistakes in mind — let’s talk about wise uses of travel credit cards!
Will Having Lots of Credit Cards Hurt Your Credit Score?
If you don’t pay them: big time.
However, if you pay them in full — and don’t carry a balance at all — your credit score will actually go up with a lot of cards. Honest – it will.
Debt-to-credit (or “credit utilization”) ratio is very important to your credit score. You want this number to be very low.
Say you have a $12,000 credit line on a Capital One Rewards Venture Card (learn more). Maybe you have a $3000 balance on that card (and pay it off, of course). Your debt-to-credit ration is $3000 to $12,000 or 25%.
You don’t want to go much higher than that. Try to use less than 30% of a card’s available credit.
But if you have several credit cards and keep your spending in check, your debt-to-credit ratio should be A-OK.
For example, if your total combined credit lines amongst five credit cards come out to $50,000 and you’re using $5,000, you’re at 10%.
See that math? Make sense right? (*cue a light bulb going off in your head*)
What Will Hurt Your Credit Score?
Enemy number one is not paying your credit cards. I cannot stress that enough.
Applying for credit cards does negatively affect your credit — but not for long. Your credit will be docked a few points for (in my experience) a number of weeks to a few months (think max three).
That’s why it’s best to keep credit card application days 91 days apart. You can absolutely apply for more than one credit card on one day. Just be ready for approvals, minimum spend requirements, and any applicable annual fees.
And if there’s no way you can meet the minimum spend requirements on every card for which you’re applying, hold off. Be conservative unless you are a pro at this.
Can Lots of Credit Cards Hurt My Chances of Getting Bank Loans?
Lenders get understandably skittish If you constantly apply for credit cards; they wonder why you always need credit. They’ll likely view you as a risk.
And you really don’t need that problem if applying for a mortgage, student loan, or another major loan. Those are bigger, more important needs than travel and travel credit cards.
So, again, every 91 days (at least) is still in 2019 a good rule of thumb for credit card applications — assuming you aren’t buying a house, taking out a loan for school, etc.
How Can Credit Card Companies Afford to Pay Airlines and Hotels for All Those Trips?
Annual fees and interest rates. Can you imagine how many of other people’s trips I paid for with my travel cards blowing through all that money when my mom died? Of that $6000 in interest and fees, I personally probably took two trips — valued at a total of $900.
Plus, not everyone uses their points or miles. Three times in just the last week people told me “I have all these miles but don’t know what to do with them!” There are a lot of others like that, too, who will never spend down their miles (#ProTip – if you need booking help – I have a team ready to help).
Why Is It Important to Pay Off Your Credit Card in Full Every Month?
When you don’t pay off a credit card’s entire bill, you’re charged interest. Nasty, huge, ugly interest.
And that’s assuming you don’t miss the payment altogether and get nailed with a late fee.
Interest payments do not earn miles/points or count toward minimum spend requirements. You essentially throw away money when paying interest. Any and all value of your points you did earn from spend is now worthless. And remember that Amex may not even credit any Membership Rewards points if you’re late paying your bill!
Worst of all, it’s easy to get underwater in payments — and not afford to swim out.
What About Canceling Credit Cards?
Many people seem to think canceling a credit card will somehow trigger Armageddon.
I’ve done it several times and the world is still here.
Canceling a credit card on your own initiative can slightly ding your credit score — but if done correctly, it should knock you down only a few points.
First, if your credit card has no annual fee, just leave it open and don’t use it. The issuer will report it every month as current and paid.
If you must cancel a card with an annual fee, ask the issuer to waive the annual fee or issue a spending challenge to make it worth your while.
If the issuer says no, you’ll want to shift almost all your credit line to another card with that bank. For example, say you have a Chase Sapphire Preferred card you’re closing and also hold a Chase Freedom Unlimited card. For math’s sake, we’ll say the Sapphire card has a $10,000 credit line.
First, freeze your credit. Why? Some credit card issuers will run what is called a hard pull on your credit before transferring credit lines.
We’ll shift $9000 from the Sapphire Preferred card over to the Freedom.
THEN we’ll cancel the Sapphire Preferred credit card.
That will help your overall debt-to-credit ratio and that of the card to which you’re transferring.
Bottom line: Consumers canceling credit cards isn’t a big deal. Credit reports will show that you opted to close a credit card. Credit card issuers and banks forcing the closure of credit cards is something to avoid. That doesn’t look good on your credit report.
”But if the APR is Low…”
A family member once called me and asked, “What’s a great travel credit card with lots of miles, no annual fee, and low APR?”
I told her there isn’t one. Because, again, annual fees and interest rates are how credit card companies pay for many cardholders’ “free” trips.
If you have to worry about APR, do not get a travel credit card! In fact, you probably shouldn’t get a credit card at all. Why? Because you already plan on buying something you can’t immediately pay off. Seriously. Pay cash instead. For online purchases, use PayPal. Or consider a secured credit card (more on that in a few minutes).
”I Don’t Trust Myself.”
A client with whom I work Vegas jobs once said to me, “I just want (M Life) Pearl status with MGM (Resorts). Is that too much to ask?!”
I suggested he sign up for The World of Hyatt credit card. He’d receive complimentary Discoverist status, could then match that to M Life Pearl, and still enjoy the Hyatt card’s annual complimentary night.
He sighed and said, “That sounds great. But I don’t trust myself with a credit card.”
End of conversation. (At least the client was honest and that shows wisdom).
Status, points, miles, and complimentary hotel nights are anything but free if you can’t be trusted — especially by yourself — with a credit card.
If you have the same concern, just don’t risk it.
Do Business Cards Count Against Your Personal Credit Score?
Business credit cards generally do not count against your credit score. But that doesn’t mean you can charge a massive bill and not pay it off.
Some credit card companies report to commercial credit bureaus. Not to mention, many small business credit cards require personal guarantees. So you’re still on the hook one way or another.
How Did I Repair My Credit Score?
It took a long time and a lot of sacrifices. I lived with roommates longer than I ever anticipated. I delayed getting married.
I started with a secured credit card. I made a $600 deposit toward a new Wells Fargo secured card. So $600 was my monthly credit limit. I charged only what I could pay. Had I not paid off the balance, Wells Fargo would simply deduct whatever I owed from the $600 (and that never happened). Nothing would be reported to the credit bureaus.
I also worked a job that didn’t have company credit cards. So I paid for company expenses using a higher-limit card I left often, submitted expense reports, and my employer’s accountant sent my credit card company a check.
So What’s the Point (Pun Fully Intended)?
Once I got my act together and sssssllloooowly reintroduced myself to credit cards, I was fine. Credit card points and miles have paid for dozens of trips, including business class flights to Europe and Asia and stays at gorgeous hotels.
If you keep track of all your cards, are respectful of your credit, don’t buy anything you can’t afford, and pay your entire bill on time every month, you might enjoy a lifetime of free (or significantly discounted) travel.
Credit is impossible to encapsulate in one Rookie blog post. There are entire books about the subject. But if there’s something that isn’t clear or you have a question we didn’t cover, please ask it below. A number of readers know their stuff when it comes to credit and hopefully they’ll share their tips and experience with us, too! – Chris