Frugal Travel Introduction
Starting Out on Miles and Points
Booking Revenue Flights - Part 1
Booking Revenue Flights - Part 2
In This Post
In the upcoming posts, I will be going through some miles and points opportunities that come from credit cards. I do not take credit lightly as this is a big part of anyone's financial future, and it is important to protect it. Therefore, I would not suggest considering any new credit card without learning basic credit information, committing to at least monitoring your credit periodically, and researching the credit card(s) in depth. What I have found is that while guarding my credit and inquiries in the past year, I have actually been better at monitoring my credit, improving my score, and knowing the effects more.
Our View on Finances
In our finances, we tend to agree mostly with the Dave Ramsey style of managing money. We strive to be debt-free (but have a mortgage), like to think long term in our investments with mutual funds, and agree with his strong commitment for keeping a budget, "A budget is telling your money where to go instead of wondering where it went."
However, when it comes to check-out, we would disagree. He is strictly cash and only debit card if necessary. If I ever went out to dinner with Dave and he is paying, I would ask him to flow the cash through me instead, and I will swipe my 2x or 3x points Chase Sapphire Preferred card :). I would love to manage his office, cell phone, and internet payments with him cutting me a check after I earn 5x points from my Chase Ink. So actually, the main area where we would disagree, could be pretty complimentary!
But, I do agree with him that we need to honestly think about how a credit card influences our spending habits. In my opinion, it is important to only use a credit card as a payment method at checkout and not a method of financing a large purchase. This is especially important in regards to reward credit cards where interest rates are typically higher than on lower benefit cards. For clarification purposes, we always pay our entire credit card bill(s) in full every month.
The FICO Credit Score
Let's look at the makeup of a FICO credit score first. Below is an idea of what parts make up the credit score calculation. This pie chart is explained more on FICO's website, but it can be seen that the largest part (65%!) that goes into a score is:
1. Payment history
2. Amounts owed.
Amounts owed is based on outstanding credit balance (as reported on most recent statement) divided by available credit. Another term that might be used is "what is my utilization ratio?"
So, how can this game of miles and points help in these two largest categories (payment history and amounts owed)? Well, the more cards showing good timely payments, the higher the portion of 35% will score out the best.
If I only have one or two cards with $5,000 of available credit, and I pay off my $2,000 balance in full each month after the statement cuts, then that still would reflect a 40% utilization ratio. This would be considered high usage of amount available to me and would actually hurt my score.
But, by having a few cards with $5,000, $10,000, or $20,000 credit limits, I will hardly ever even register a utilization ratio. By showing the credit card companies the ability to 1. not miss payments and 2. keep my balances low in relation of available credit, I will be raising my score AND earning lots of travel rewards at the same time!
It is correct, however, that opening new debt will have a degree of negative impact to credit score. The two parts of the above pie chart that are specific to this are Credit history and New credit. By opening new cards (accounts), the average length of history will go down. Each inquiry will have anywhere from a 2-5 point effect on the credit score right away, but it recovers in 90 days. New inquiries will last on a credit report for two years, having a less and less affect on credit score as they approach the two year mark. As these cards age, the history will grow.
Keep in mind it is important to NEVER close off those old cards that hopefully have no annual fee (think department store credit cards or similar). The longest aged account is a part of this 15% pie for credit history, and it is important to keep the old ones around. You never want to close your oldest credit card! By closing those old accounts, you could actually hurt your credit score.
The Three Credit Bureaus
Knowing what goes into one score is not the end to knowing how the score will show to the next creditor who pulls a report. Why? FICO is just one scoring model, although it is the most widely used. There are several others and also three different credit bureaus: Transunion, Equifax, and Experian. So realistically, there are several different ways someone could provide a "credit score."
Essentially, there are several calculations based on three bureaus. This could be confusing. What I would rather focus in on when monitoring my credit is not the specific score, but instead the activity being reported and the direction my "credit score" is going. These are at least good determining factors on what my score was from my last pull to the next.
How We Keep Track of Inquiries
I have a spreadsheet to track every single inquiry on each of our credit reports and to keep track of when it will fall off. I also monitor which of the three bureaus each of the inquiries hit. Not all credit cards will pull from all three bureaus. It varies by bank, and each bank could pull one, two or three of the bureaus. There is even a website that users report what they have experienced with each bank.
In Minnesota, I know when applying for a card, and if that card happens to be Barclays, they are most likely only going to pull Transunion. If applying for a Citi or Amex card(s), my experiences have been only Experian. With Chase cards, I will get a hit from Experian and Equifax. Capital One gets the big "think twice" from me not only due its lackluster rewards, but also since it will pull all three of the bureaus.
Monitoring Credit for Free
There are several resources that can be used to keep track of your credit without paying a monthly service charge.
Annual Credit Report
This is a must for everyone. Each year everyone is entitled to one free full credit report from each of the three bureaus. The score would require a payment, but tracking what is going on inside each of the reports is the most important.
Credit Karma
The Credit Karma website is based on the user's Transunion report. What goes into the score provided can be read more here, but I like a few things about this website:
1. It monitors how many Transunion inquiries I have and tells me within a day or two when it happens. I can track my Transunion pulls pretty simply by following this website.
2. I can log-in every 6 days if I want, and it will provide updated Transunion information. As long as I log-in once a month, it will track my score and chart it.
3. There is a credit simulator that can be used to see how adding a new account, increasing credit limits, or adding inquiries will affect their scoring algorithm.
Credit Sesame
The Credit Sesame website is somewhat similar to Credit Karma, but it tracks my Experian report. There is not a continuously tracking free site for Equifax, but by combining Credit Karma and Credit Sesame, I can at least track all my activity within two of three bureaus. It does not give monthly balances or finer details of the credit report, but it does a great job of tracking my inquiries. I have the app downloaded on my phone, and I usually receive a notification within a day when an inquiry has occurred.
Quizzle
Quizzle is also used to monitor Experian. This website allows a full report to be pulled every 6 months.
Target free monitoring - must request by 4/23/14
With the recent Target data breach, they have offered free monitoring for one full year if signed up through the attached link. This allows free monitoring on Experian.
One last way I check my reports is when I get a new credit card. The verbiage within the disclosure that comes with the credit report usually provides the credit score used, so I write it down for a data point. In addition, it provides the bureau used to pull credit and includes a link to go online and get a free report if there was any negative action on the application. I always consider the fact that I may have had a lower interest rate (although I am not concerned on rate since I never carry a balance).
The Two Golden Rules to Follow
There are two rules to follow if looking to sign up for credit cards:
1. If your credit score is below 700, it is best to lay low.
It is a good idea to maybe apply for one or two cards just to build payment history and to increase available credit, but nothing more than that. If at any point, your credit score goes below 700, it is a good idea to focus more on the monitoring aspect rather than signing up for credit cards. At this stage, it is more about the credit building.
2. Be very careful or stay away from any new cards if a major purchase is coming up in next year or two.
Ideally, it is good to stay at or above a credit score of 720, but better yet even closer to 740. This would enable one to get a good interest rate if ever deciding to open a new line of credit that would actually require interest to be paid. Also, by allowing inquiries and account history to season a bit, this would likely increase your credit score prior to applying for new credit (example: mortgage).
Additional Advice
To start, I would suggest getting a few credit cards that you know will be around for a while. This would include cards that have no annual fee, those that can be "downgraded" to a no annual fee, or a card that has an annual fee but the anniversary bonus has more value than the fee, so it is worth it to keep around. In all those instances, the first few cards are good building blocks for raising credit score and establishing a good relationship with some of the strong players in the credit card industry (Chase, Citi, and Amex). Start small, focus on your travel goal(s), and make sure to do your research first!
Resources for Beginners
Here are a couple of good blogs to read beginner information in relation to credit usage:
Frugal Travel Guy
Million Mile Secrets
The Points Guy
Mommy Points
Well Traveled Mile
Up Next
I will be covering Southwest Airlines, so stay tuned for a breakdown of one of our favorite airlines and rewards programs. And as always, if you have questions or comments, we would love to hear from you!
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