Perhaps one of the most fun money saving strategies I’ve found from the financial independence community is “travel hacking.” Travel hacking is the process of using credit card incentives to pay for a portion or all of the cost of travel to include airfare, lodging, and sometimes even attractions.
My first glimpse into this strategy came from a family member who is completely outside the FI community. I learned that he was able to score tickets to Europe using the sign-up bonus rewards miles he received from applying for a new credit card.
My initial reaction after hearing about this was to dismiss this strategy as foolish. Doesn’t he care about his credit score at all? How could someone be so careless about their finances that they would risk taking on new credit in order to afford international travel? If you can’t pay for it, then you shouldn’t be doing it, I thought. Anyway, I’m already getting cash back for using my credit card. I could just use that cash-back to pay for my travel.
Fast forward a few years to after my FI awakening. I was listening to the ChooseFI podcast, episode 9: Travel Rewards: How to travel the world for free (The easy way). It finally made sense. This isn’t a way to pay for something you can’t afford. This is a way to make the credit card companies pay so that you don’t have to. As someone else so aptly put it, the credit card companies are willing to bet that you can’t handle credit. I had been leaving free money on the table for years.
Do the math
Here’s an example that I think illustrates the math behind why this is such a powerful tool to use. The Chase Sapphire Preferred Credit Card offers a sign-up bonus of 50,000 Chase Ultimate Rewards points after you spend $4,000 in the first 3 months. Those 50,000 points are most valuable when redeemed through any of Chase’s many transfer partners – airlines, hotels, etc. When transferred, these points are worth between 1.5-2 ¢ per point but at a minimum, they have a cash value of 1 ¢ per point. That means that if you meet the minimum spend on their card, you will have at least 54,000 points. That’s an over $1000 travel value or $540 value. The instant return on your spending then, is 13.5 – 27%. That’s a better return than the stock market and you’re going to be spending the money anyway.
Don’t lose the bet
This is not a strategy for people who have a poor credit score or are already in credit card debt. It is also not for people who have trouble paying their bills on time each month. Additionally, if you think you will spend more in order to reach the minimum spend limit on the card, you will likely not come out ahead using this strategy.
However, if you are someone who always pays off your credit cards each month, never misses a payment, and can resist the temptation to overspend in order to meet your goals, then this strategy might be for you.
The best tip I can give is to turn on automatic payments the day you receive your card. This will guarantee you don’t accidentally miss a payment and end up owing a fee plus interest.
Isn’t this bad for my credit?
My biggest hesitation when I initially heard about this strategy was the effect it would have on my credit score. It is true that both the new credit inquiry and the effect a new credit card will have on your age-of-credit-history will ding your score by a few points. However, this initial ding will be negated by your credit utilization going down. Your credit utilization is how much of your available credit you consistently use. Since your new card will increase your total credit limit and your total spending will stay the same, your utilization will decrease. Since credit utilization is more heavily weighted when determining your credit score, your credit score may even go up due to this strategy (mine did!). I have opened 4 new credit cards over the past 9 months and my credit score has gone up between 5 and 10 points.
How to start
First of all, some card companies (namely Chase) have restrictions. Chase will no longer approve applications if you have opened 5 or more cards – from any issuer – in the last 24 months. This is important because many of the most valuable rewards cards are issued by Chase. That is why I recommend starting with Chase cards and then moving on to other company’s cards. Additionally, this 5 in 24-month restriction is per person so if you are married, you and your wife may each open 5 making it essentially 10 in 24 months. Keep in mind that if either of you get an authorized user card for the others’ account, that will count against you both so this is not the best plan.
My top recommendation for your first rewards credit card is the Chase Sapphire Card. There are actually two different Sapphire cards, the Preferred and the Reserve. Both offer a 50,000 point sign up bonus after a $4,000 minimum spend in the first 3 months. One big difference between the two is the annual fee. The sapphire preferred has a $95 annual fee which is waived for the first year. The sapphire reserve has a $450 annual fee which is NOT waived the first year. For this reason, I recommend the sapphire preferred card for most people.
However, if you are an active duty military member, Chase will waive the annual fee for either card. Therefore, I recommend the sapphire reserve to military members due to the cards’ additional benefits. These include 3x points on travel and dining, $300 annual travel credit, and points are worth 50% more when redeemed through the chase ultimate rewards portal.
How to redeem
Once you have earned the sign up bonus and the points are sitting in your rewards account, they can be redeemed for travel. The best way to get the most out of your points is to transfer them to one of the rewards systems’ transfer partners. Airline transfer partners will provide the best value for your points, followed by hotels. Chase Ultimate Rewards for example has 9 airline transfer partners including United, Southwest, and British Airways.
Another way to redeem your points is through your card’s rewards portal. Here, you will likely get a better than 1 ¢ per point value from you points. For instance, the Chase Sapphire Preferred portal will give you 1.25 ¢ per point redemption value and the Reserve allows you to redeem at 1.5 ¢ per point.
You can also redeem them for cash at a rate of 1 ¢ per point but this will provide you the lowest value for your points.
Where to go from here
This information alone should be enough to get you started on travel hacking. There is plenty of additional information to cover and much of it is changing every day. Shop around for the best sign-up offers because they change regularly as credit card companies continue to compete for your business. If you are responsible with your credit and careful not to change your purchasing habits, you can reap huge rewards through travel hacking. Enjoy your travels!