Are credit cards dangerous or the key to traveling the world for free? We debunk a few myths to help you decide.
If you’re into seeing the world—and since you’re reading Fodor’s, chances are you probably are—you must have heard about travel rewards credit cards and earning free travel by leveraging airline points and miles. And how could you not? It seems that everyone and their dog is flying to exotic destinations in business class and staying at five-star resorts for next to nothing these days.
You must have also heard the other side of the story: Credit cards are the source of all evil and should be avoided at all costs. As it happens, the truth is somewhere in the middle. Let’s take a look at the most common myths regarding rewards credit cards, which hopefully will help you form your own opinion about the whole travel hacking thing.
Myth No. 1: Credit Cards Are Evil
Money guru Dave Ramsey’s devout followers will be the first to say that credit cards are the spawn of Satan, whose destructive power can be warded off only by a cross made of debit cards.
Let’s talk numbers: The national average credit card interest rate sits at 17.73%, according to CreditCards.com, and many travel rewards cards’ APR is higher than 25%. Travel rewards cards offer a 5% return at best in select shopping categories, and most rewards hover in the 1.5%-2% zone. At these rates, it’d be foolish to carry a balance—any credit card rewards earned will be erased quickly by the accrued interest.
It’s true that when used irresponsibly, credit-card debt can spiral out of control and cause financial problems. However, if you budget your finances correctly and pay off the balance in full every month, you can use credit cards to your advantage as a tool to subsidize your next vacation.
Myth No. 2: Applying for Too Many Credit Cards Hurts Your Credit Score
Applying for a new line of credit, be it a car loan, a mortgage or a new credit card, lowers your credit score temporarily. However, once you start making timely payments, the score bounces back within a few months.
Additionally, your overall credit limit increases with every opened credit card. The less of that limit you utilize, the higher your score goes up. For example, borrowing $500 from a $1,000 limit bumps up your utilization rate, also known as debt-to-credit ratio, to 50% of the total credit line. It is recommended to keep your utilization rate at less than 30%, which is much easier to do with an overall credit limit of, say, $10,000 than $1,000.
It isn’t unheard of for many reward travel enthusiasts to have a credit score above 800 simply by managing multiple credit cards responsibly.
Myth No. 3: Closing Credit Cards Hurts Your Credit Score
Yes, it’s true that big loans ding your score once paid off or closed. This happens because of the aforementioned credit utilization. Once your overall credit limit decreases because of a closed credit card, make sure to keep your debt-to-credit ratio in control. It shouldn’t be hard to do with a high enough credit line on other accounts.
However, you might not be aware that the temporary score decrease doesn’t happen overnight. Closed credit cards age on your credit report for 10 years before they drop off into abyss, which means the effect to your credit score isn’t immediate.
Additionally, consider keeping the oldest account open indefinitely. Length of your credit history contributes to your overall FICO score, and it’s in your best interest to keep an old credit card open for as long as possible, even if you don’t use it often. Swipe it once per year to prevent it from being closed for inactivity, and your credit history will thank you. It’s especially easy to do with cards that don’t have annual fees.
Myth No. 4: It Takes Forever to Earn Enough Rewards for a ‘Free’ Flight or Hotel Stay
Most travel credit cards offer sign-up bonuses large enough for a round-trip flight to Europe or South America in economy class or several free nights at a chain hotel. The trick is to sign up for one, or more, of these cards when the welcome offer is higher than usual. If you’re new to the hobby and not sure if an offer you see is a good one or not, feel free to follow expert blogs, such as FrugalTravelGuy, for the latest card offers.
Additionally, many airline and hotel programs partner with dining and shopping portals, rental car companies and ride-hailing services for a chance to earn more points on the purchases you already make. Flying isn’t the only way to earn travel rewards, and you can keep earning points and miles beyond the initial credit card sign-up bonus by participating in these promotions.
Myth No. 5: Credit Card Annual Fees Aren’t Worth Paying
Because travel credit cards are so rewarding, they usually come at a cost. Annual membership dues vary from $95 for mid-grade cards to $450 and $550 for premium travel cards, such as the Chase Sapphire Reserve and the Platinum Card from American Express. If you’re serious about leveraging credit card points and miles for a subsidized vacation, don’t scoff at paying these fees. Why? Because in most cases, the benefits outweigh the cost.
For example, many co-branded airline cards offer free checked bags; co-branded hotel cards offer free annual nights; and premium travel cards offer travel credits, airport lounge access and even TSA Precheck or Global Entry enrollment fee credits. If you’re doing it right and travel enough, you can offset the fees by simply using the provided card benefits.
It’s true that travel rewards, credit cards and frequent-flyer programs are not for everybody. Participating in this hobby requires organizational skills, responsible budgeting and a little patience. However, don’t be scared. As long as you stick to paying all bills in full, manage your cards and learn how to offset annual fees, you can fly in style to exotic destinations as well. Maybe not with your dog, but with a human companion or two.