Travel Hacking with Poor Credit
As I was browsing Mr. Money Mustache’s forum. I came across this post. Where user payitoff asked about travel hacking with poor credit. This made me think about one of the most common question I receive.
I have bad credit, can I still travel hack?
Simple answer is yes you can.
Travel hacking relies heavily on earning miles through credit card sign-up bonuses and spending. Some of these cards require good to excellent scores to obtain. So maintaining or rebuilding a good score will help you throughout your travel hacking hobby. Don’t worry if your score is poor or in bad shape the good thing is you can always fix it. You first should understand what goes into your credit score.
How do you calculate your FICO score?
Your FICO score is calculated from five categories outlined above. The percentages in the chart reflect how important each of the categories is in determining how your FICO scored are calculated.
- Payment History (35%) – This is the biggest and most important portion of your report. Making on time payments each month will produce a good score. Don’t worry having a few late payments will not automatically decrease your score but you should definitely aim to keep late payments to a minimum or zero if possible.
- Amounts Owed (30%) – Second highest portion of your report. Having low amounts owed is good for your score but zero amount is even better. If you have to keep an amount, I suggest to keep your credit utilization rate below 20%. For an example, if you have a credit card with $10,000 credit limit and a $2,000 balance. Your credit utilization is 20% ($2,000 divided by $10,000 equals .20).
- Length of Credit history (15%) – The longer your credit history the better your credit score. If you still have that credit card you opened at a department store or when you turned the age of 18. I highly recommend that you never cancel that card because your history is based off the longest established account.
- Credit Mix (10%) – You need a mixture of different types of credit. Such as credit cards, installment loans, or mortgages loans. Here’s an interesting fact. People without a credit card are viewed as higher risk than individuals who manages their credit cards responsibly.
- New Credit (10%) – Individuals are afraid to apply to new credit because it drops your FICO scores. The truth is it will drop but not by that much. New credit is a part of your score. If you keep your card open for a couple months. Your score will eventually increase to where it was or potentially even more. See my Myths page about my credit score actually increasing over time even though I applied for multiple credit cards.
Develop good habits!
Now that you know what goes into your credit score the next step is developing good spending habits, being responsible, and rebuilding your score.
- Pay off your balances – Paying off your balance in full is a key part of this hobby. If you don’t, you’re at risk of paying interest fees on your current balance. We are in this game to lower our costs not increase them.
- Pay your bills on time – I understand that sometimes we may forget to pay our bills. My personal solution is to automate your payments. I enable auto-pay on each of my credit card accounts to pay the minimum payment by due date. That way if I ever forget to make a payment I know I’ll be covered.
- Live within your means – This is common lifestyle advice. Let’s face it: cutting back is no fun. But it’s definitely necessary if you find yourself struggling to meet basic financial needs and falling deeper into debt.
- Don’t apply for new credit cards or loans you can’t afford – Don’t apply for credit when you have current debt to tackle. Pay down any current credit card debt that you have. You don’t have to focus on student and mortgage loans as they are actually good for your credit score.
Once you hit a credit score of at least 650 then you can apply for that travel rewards credit card. I would suggest starting off with a no annual fee cards like the Chase Freedom or AMEX Everyday card. Then move towards other premium travel reward cards. Remember to go back to your foundation of good habits whenever you’re approved for a new card.
What are some other good habits that you can share to those rebuilding their credit score?