How Travel Hacking affects your Credit Score

Updated: Aug 14, 2016

Credit Score is a big, weird, scary monster under the bed for a lot of people. A LOT of my friends (I'd say 80%) don't play this Travel Hacking game because of a fear of their Credit being affected. Well I am here with some data and some facts to help put your mind at ease or at least just to clear up some misconceptions about how applying for and having lots of credit cards can affect your credit score. 

When I first started with Travel Hacking, even though I had heard about people getting crazy deals on flights and stuff, my mind was totally switched off as soon as I heard it had something to do with credit cards. Something about signing up for anything always makes me think there is a scam. "What's the catch" There's always a catch" I would say, and I was right, as there usually is some set of rules dictating what you have to do to earn certain rewards. However I was encouraged by some new friends to approach the problem differently. Rather than think "How is this trying to screw me over?", I started to look at "How can I take advantage of this without getting screwed over". I have detailed a set of resources on How I Travel Hack but I want to document here the effect that Travel Hacking has had on what I was the most worried about, my credit score.

**Disclaimer**

Let's make sure we mention here that I am not an expert. I am only giving advice based on my individual experience. Your results may vary and for professional advice, you are out of luck because nobody really knows the full intricacies of credit score except Equifax and TransUnion. If you want to play this game, don't hold a balance...ever, and be organized in tracking when payments are due, cancellations, etc.

Common misconceptions

  • If you get more than one credit card you will never be able to get a mortgage/house loan
    • Not true. New cards affect your score but not by as much as you think.
  • The more credit cards you have, the lower your credit score
    • Not true. the more available credit you have, the more you can demonstrate the ability to pay on time and utilize an appropriate amount of it.
  • You need to have a business to get a business credit card
    • Not true. You can use your name as a business name. It's called Sole Proprietor and the credit is assessed off your own personal score.
  • Every time my score is looked at, I lose points
    • Not true...necessarily. There are hard pulls and soft pulls of credit. See below for more details.
  • Getting rejected for a credit card means I won't be able to get that card.
    • Not true, except in extreme circumstances. There is always a reconsideration line where you can explain your intentions to use the card and possibly even the reasons why your score is low. They want your business so they reconsider and often approve within minutes.
  • I have to pay the credit card off before the statement comes out or I will get charged interest.
    • Not true. Credit Cards have an interest free period (Check your card to be sure of the details) and it is usually around 21 days. You can pay the card off before the statement comes out, or after. But the amount on the statement (the balance) is due on the payment due date specified usually by "minimum payment due" or similar.
  • I just need to make the minimum payment, I don't need to pay the whole card off
    • Answer varies. There are 2 types, Credit Cards and Charge Cards. A Credit card requires you to pay the minimum payment, then they just charge you interest on the remainder. If you pay the minimum payment, your score is not affected, but you do pay interest which sucks. A charge card is like an open line of credit but has to be paid off in full each month. If you don't pay it off fully, that counts on your credit score as a late payment.

Credit Score Basics

Your personal Credit Score is linked with your social insurance (social security/tax file number) and is determined by a couple of third party organisations who collect information about your financial trustworthiness.

Equifax and TransUnion

The third parties are called Equifax and TransUnion. Equifax has a 30 day free trial where you can get your score and report all online. You have to remember to cancel the trial within the 30 days though otherwise you will get charged! 

Hard Pulls, Soft Pulls and changes

Anytime your score or report is pulled, it is called an inquiry. If it is pulled by yourself, or for info purposes, it is called a soft pull and will not affect your score. If somebody is pulling the report for assessment/approval purposes, they have to register it as a hard pull which often affects your score and can do so in a matter of hours. Your score can change when a financial institution/lender contacts the credit authority which is usually during a hard pull, and also when your statement posts to your account on a credit card.

What is the score ?

The score indicates how likely you are to pay back money that is available to you and is determined by several factors outlined below. The companies who determine the score may not give you the same score so feel free to check both for around $25 each from EF and TU. The score algorithms are proprietary with as many as 1,000 data sources contributing to somebody's score. They created the algorithms by studying the relationship/correlation between people's behaviour and the repayment of debt they owed. 

Credit Score DNA

New Credit contributes only 10% of your score 

  • Payment history (35%)
    • Do you pay your bills on time
  • Credit Utilization (30%)
    • How much of the total credit that you have, do you use?
      • If I have 2 cards with $5,000 limit, my total credit is $10,000
      • If I have a $2,000 bill and a $3,000 bill, I have utilized 50% of my limit.
  • Length of credit history (15%)
    • Average age of all accounts
  • New credit (10%)
    • New Applications for credit
  • Type of credit used ( 10%)
    • Mortgage, credit card, line of credit

This little orange guy is what people are worried about with credit card applications. You shouldn't be worried about Payment history because you should always pay it off in full!

Credit Score Analysis

This image is a graph of my credit score and how it has been affected over the last 9 months by my travel hacking. I will try to break this down as best I can below.

Activity (Monthly)

April 2015 >

751
✔ Great starting score from cell phone and a CIBC card for 1yr

May 2015 >

↓ 710
✔ Paid on time
✘ 4 new CC apps (~10pts each)

Jun 2015 >

↓ 699
✔ Paid on time
✘ High Spend on Amex Biz Gold (40k bonus)

Jul 2015 >

↓ 680
✔ Paid on time
✘ High Utilization (80%+)
✘ Cardholder for spouse?

Aug 2015 >

○ 681
✔ Paid on time
✘ Moderate Utilization (50%)

Sep 2015 >

↑ 710
✔ Paid on time
✔ Low Utilization (5-10%)

Oct 2015 >

↓ 698
✔ Paid on time
✘ High Utilization (80%+)

Nov 2015 >

○ 699
✔ Paid on time
✘ Moderate Utilization (50%)

Dec 2015

○ 699
✔ Paid on time
✘ Moderate Utilization (50%)

Jan 2016 >

↑ 712
✔ Paid on time
✔ Low Utilization
~ Cancelled 1 Card (5k limit)

Feb 2016 >

↑ 729
✔ Paid on time
✔ Low Utilization

Mar 2016 >

↑ 734
✔ Paid on time
✔ Low Utilization

Apr 2016 >

↓ 701
✔ Paid on time
✘ Cxl 2 cards
✘ 1 New card app
✘ High Utilization

May 2016 >

↑ 716
✔ Paid on time
✔ Low Utilization

Jun 2016 >

↑ 720
✔ Paid on time
✔ Low Utilization
- Cancelled 1 card (5k limit)

Jul 2016 >

↑ 724
✔ Paid on time
✔ Low Utilization

Aug 2016 >

↓ 720
✔ Paid on time
✔ Low Utilization
✘ 1 New card app

Key Lessons

What made it go down

One of the biggest things was, yes, new credit. New credit only accounts for 10% of the score, but it hits hard. It is like a slap on the leg, it shines bright red and it hurts, but it does go away quickly because it's only a piece of the puzzle. 

Another thing that got me was high utilization. I was still stinging a bit from the slap then somebody punched me. It can bruise slightly deeper as it counts for 30%. But at the same time, low utilization is good and it counts as 30% too, so all is not lost. The number to keep in mind is 30% - keep your utilization below 30%. So if you have 2 cards with $5,000 limit each, your total available credit is $10,000. Never spend more than $3,000 in one month.

If I had late payments that would have affected me by as much as 150 points! That's like a deep cut to the leg, it hurts and it will take a long time to heal. So never have late payments! 

Cancellations will affect the total available credit you have, and also the average age of account, so be aware of that. Usually it makes the score go down slightly but not for long. So space out cancellations, the magic number is around 3-6 months.

What made it go up

Look again at the pie chart. As much as some of these things can affect you negatively, they can also positively affect you and you should use them to your advantage. Always pay on time...always. Charge cards especially, and credit cards just because otherwise you pay interest and that negates the point of doing any of this anyway as you aren't saving money anymore, you are spending it.

The best thing for me was to always pay on time, and keep my utilization down below 30%. Pointshogger recommends that you should keep it above 1%, but below 10% and this will be the most beneficial, however anything below 30% is good.

Advice

The best advice I can give is:

  • Always pay your bill on time
  • Go slow and work within your comfort level
  • If you are planning to get a mortgage or loan, give yourself 6 -12 months without new credit applications or cancellations and maybe lower the limits on some cards.
    • Think about this, your credit score helps determine the interest rate the bank will give you. A higher interest rate could cost you tens of thousands over your lifetime for a mortgage. It is in your interest to keep your score healthy.
  • Space out cancellations of cards
  • Always pay your bill on time....always.
  • If you have specific questions, ask a professional financial advisor
    • You can also try speaking to a mortgage broker, but make sure you find one you can trust.

Further Reading: