Travel rewards and credit cards can be really confusing topics. If you are new to the world of credit cards read on. Here are a few of the most commonly asked questions about travel rewards credit cards.
Q. I don't have any debt, not even a mortgage, and I have a really good income. Why can't I get approved for a credit card?
Not having any debt is fantastic! You clearly are doing something right, you are responsible, live within your means and don't take out loans you don't need. Credit card companies, however, want to see a history of on-time payments, they want to see a credit record. They want to know that if they extended you credit you will be making payments on time. If you've never taken out any loans or had a credit card before, they don't know if you are a good or bad credit risk. They just don't know enough about you.
What you need to do is to build credit and get on the lenders' radar. Don't try to apply for a premium travel rewards credit card like Chase Sapphire Preferred Card. Your chances of approval are very low. Start slow with a credit card from your local bank or a credit union, where they know you. Discover credit cards tend to be easier to get for people with no or little credit history.
Another great way to build up your credit score is to be an authorized user on someone else's card. If your family member or a friend you trust has a great credit score and a long credit history, ask them to add you as an authorized user. They don't even need to give you the actual card. Just being associated with them will help build your credit history.
Q. I have a perfect credit score and I don't want to mess it up! Will applying for credit cards ruin my credit score?
OK, we know you are very proud of your score. However, this isn't your college GPA. You might be a perfectionist but you don't need to maintain a perfect 4.0 all the time. Your credit score is a very valuable tool, use it to your advantage! Put that perfect credit score to work! You will get the best mortgage rates, auto loan rates, and the best credit cards with your high score.
Make no mistake, you do need a good credit score to get approved for the travel rewards credit cards. In order to get approved for the best credit card, such as Chase Sapphire Preferred Card or Chase Sapphire Reserve, your score needs to be in the high 700s. These are considered to be two of the best and the most valuable cards on the market right now. So go ahead, apply for one of these and reap the rewards!
Q. My credit score is not that high, what credit cards can I get?
With an imperfect credit score you won't qualify for the best travel rewards credit cards. If your score is lower than 700, it will be hard to get good travel rewards credit cards. That's OK, there are still cards you can get with a mid-range credit score. Check out Discover or Capital One credit cards, they are easier to get for someone with a fair, but not high, credit score.
Start slow, don't get close to your credit limit and pay your bills on time and you'll see your credit score improve quickly. Also see my advice above about being an authorized user on someone else's card.
Q. Will applying for multiple credit cards ruin my credit score?
This is one of the myths that keeps people with good credit from using it to its full advantage. The short answer is no, having multiple credit cards won't negatively affect your score. You might see a slight temporary dip, just a few points, right after applying for a new card, but the effect is very short-lived.
Let's dig a little deeper here. Your credit score is affected by several factors:
- Payment history: do you make your payments on time? Have you ever been late on paying a bill?
- Credit utilization or amount owed. How much do you owe on all of your accounts?
- Length of credit history. How long did you have your accounts and how long since last activity?
- Types of credit used: what kinds of accounts you have, including revolving (credit cards) and installment (auto loans, mortgage, student loans)
- New credit: recent inquiries and newly opened accounts
Payment history is self-explanatory, you need to pay your bills on time. This is self-explanatory–pay your bills on time. Credit utilization is what might be confusing. Having more than one credit card lowers your credit utilization. Let's say you have one credit card with a $4,000 credit limit and you charge $2,000 every month. Your credit utilization is 50%, which is pretty high. If you have two credit cards, each with $4,000 credit limit, and you still charge $2,000 a month, your credit utilization then drops to 25%. Banks see low credit utilization as a good thing, you aren't abusing the credit extended to you.
Length of credit history is important but not as important as payment history and credit utilization. If you have a credit card you've had for a long time, keep it. Just use it occasionally or put a small recurring payment on it, like Netflix or your gym membership.
The last two factors are far less important than the first two. Lenders want to see a good mix of credit, they want to see you are a good risk across the board. Credit inquiries appear on your credit report for a period of time and then fall off. Some banks and credit card issuers pay more attention to newly opened accounts than others.
So as you can see, opening credit cards won't ruin your credit report. If you open and keep a card, it helps with length of credit. Your credit utilization will go down and you will gain length of credit history.
Q. So I've got the card, met minimum spend, and received the bonus. What now? Do I close the card?
Ideally, you should sign up for cards that will provide long term benefits. But either way, you should never close a credit card right after meeting minimum spend and receiving the signup bonus. Look at this from the bank's perspective, they just spent a significant amount of money to acquire you as a customer, so they want to see you use the card for longer than three months. Keep the card for at least a year, who knows, maybe you like the card and the benefits it offers and would want to keep it long term.
Q. My card's first annual fee just posted. What do I do? Keep the card? Close the card?
There are plenty of cards that are worth keeping forever and paying the annual fee. Let's look at some benefits of keeping the card long-term:
- Bonus points on account anniversary: This is a good incentive to keep the card long-term if the value of the bonus points is more than the annual fee
- Bonus hotel nights: Most hotel cards offer a free night after your account anniversary. The World of Hyatt Credit Card, for example, offers a free night in category 1-4 hotels. There are many wonderful Hyatt hotels where you can redeem the free night that are a lot more expensive than the $95 annual fee. I've stayed at a fabulous Park Hyatt Saigon in Ho Chi Minh City, Vietnam, a category 4 hotel, and the cash price at a time was around $300/night. Think about your travel plans for the next year and see if it makes sense to you.
- Great spending rewards: Some cards have bonus spend categories. If you are going to spend a lot of money in these categories then it might make sense to keep the card. For example, Chase Sapphire Reserve offers bonus points for travel and dining. If you travel a lot or eat out often, you will get great value out of these high annual fee cards.
- Great benefits: Some cards offer benefits such as no foreign transaction fee, travel protection, airport lounge access, and primary car rental insurance.
In short, keep the card if the bonus is more valuable than what you pay for the annual fee.
Q. I've looked at all the benefits of keeping the card long term and decided I don't want to keep the card and want to close it. Will I lose the points and miles I earned with this card?
The short answer is, it depends. If the rewards you earned are airline miles or hotel points, such as United Miles or Marriott points, then no, they are already in your loyalty account. If your rewards are in the form of credit card points, like Chase Ultimate Rewards points then you will need to transfer them to hotel or airline partners, your spouse, or another credit card that earns the same currency.
If you have more than one American Express card that earns Membership Rewards points then your points are safe. If you want to close your only AMEX, you need to spend or transfer them to a partner airline or you will lose the points.
Q. Will closing the card affect my credit score?
It might. If you close a card with a high credit limit it can affect your credit utilization. To mitigate this, consider transferring your credit limit to another card from the same bank and make sure you don't have high balances on other cards. However, if you have other credit cards and have good credit, the effect of closing the card is temporary so don't worry about it too much.
If you are closing your oldest credit card, you will lose the age of credit. Therefore, if you don't have other cards that have been open for a while, consider keeping the card.
Q. What if I downgrade a card with a high annual fee to a no fee card? Will I get the sign up bonus for the new card?
First, consider the benefits of the card with an annual fee. There are many travel rewards cards that are worth keeping just for the benefits alone. Chase Sapphire Reserve has a high annual fee but it comes with awesome benefits, like annual travel credit, travel delay insurance, and Priority Pass airport lounges membership. Well worth it for someone who travels a lot.
If you decide you don't want to keep the card with an annual fee, downgrading it, rather than closing the account might be the best solution. When you downgrade, or exchange a premium card for a card with no annual fee, you are not eligible for a new card member bonus. There's also no application, no credit pull, and no wondering if you will be approved for a new card. For example, you can downgrade Chase Sapphire Preferred Card ($95 annual fee after the first year) to Chase Freedom.
When you downgrade, you keep the age of account and your credit limit–two important factors in your credit score.
Q. What is 5/24 rule?
This is one of THE most commonly asked questions. The short of it, you can't get approved for a number of Chase Bank travel rewards credit cards if you have opened more than five cards (with any bank, not just Chase) in the last 24 month. Being an authorized user on someone else's card counts as one of the five slots. The most sought after Chase cards, such as Chase Sapphire Preferred and Chase Sapphire Reserve and Marriott Bonvoy Boundless Visa Signature Credit Card fall into this category. Other banks have their own application rules, but when people discuss 5/24 they are specifically talking about Chase.
Being an authorized user on someone else's card isn't always a bad thing and it doesn't mean you are automatically disqualified from getting the same card under your own name. Just beware of Chase's 5/24 rule (see above). You can ask the bank to remove you as an authorized user from the credit card. You can also ask the bank to remove authorized user account from your credit report. If you hadn't done that before applying for a Chase card and were denied because of 5/24, call and ask them to reconsider your application. Mention that you were just an authorized user and were not responsible for paying the balance.
Q. What if I wasn't auto approved?
The answer will depend on who you ask. Some people would say to call the bank right away to find out why, others say wait. I am, personally, in the wait and see camp. The bank might call you or send you a letter if they need more information. If they feel they had already extended you enough credit, they might ask you to reduce the credit limit on another card. Or your application might still work its way through the system and you will get approved a couple of days later.
If the bank declined your application, they will send you a letter with the reason for their decision and then you can call to find out more details and to plead your case.
Q. Best card to start with?
Because of Chase's 5/24 rule, it is always a good idea to start with one of Chase cards. If you have good credit, Chase Sapphire Preferred Card and Chase Sapphire Reserve are the best cards to start with. Which one to get will depend on your travel plans for the next year and your tolerance of high annual fees. If you aren't sure, Chase Sapphire Preferred Card is a sure bet. It's an excellent card with great benefits, has no annual fee for the first year, and comes with 50,000 Ultimate Rewards sign up bonus after you spend $4000 in the first three months.
Credit cards should not be feared, they are a tool in your path to FI and beyond. Treat them with respect they deserve and you will not be disappointed. Travel rewards credit cards open up a world of possibilities, they can take you and your family to places you thought were out of your reach. You can visit family more often, or you even treat someone who can't afford to travel. Whatever your goals are, there are strategies to make travel more affordable.
If you have a specific question, let me know in the comments. Chime in if you have any advice to offer someone new to the world of credit cards and travel rewards.
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