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One of the keys to successful rewards travel is achieving and maintaining a healthy credit score. The most significant points and miles earning opportunities are tied closely to rewards earning credit cards, and in addition to the potential rewards, credit cards can also offer numerous benefits such as airport lounge access, free travel insurance, additional coverage for authorized users, free or discounted companion airfares, and more.
These are the core benefits and perks that make up rewards travel and acquiring credit cards to take advantage of the massive signup bonuses, amazing travel benefits, and ongoing rewards earning potential, only available to credit card holders, requires that you maintain an excellent credit score.
The Importance of Managing Your Credit Score
With all those benefits, points, and miles hinging on a great credit score, the importance of maintaining a good credit score can not be overstated for those wishing to pursue rewards travel as a hobby.
Along with signing up for an AwardWallet account to track the points and miles earned, one of the first things to do is getting a snapshot of your current credit score. There are several ways to do this which we’ll cover below.
Where to Check Your Credit Score
The first option is to use a paid service like myFICO which can provide your official FICO score. The advantage of myFICO is that it tracks your credit score with all three major credit bureaus, giving you the most accurate data available. It’s also the service used by roughly 90% of lenders in the U.S., so chances are you're looking at the same data that lenders will be using to assess any application. The downside is that myFICO is a paid service costing $29.95 per month, a hefty price if you’re just looking to get an initial snapshot of your credit score and the factors impacting it.
An alternative is to use a free service such as Credit Sesame, Quizzle, or Credit Karma (full suite of options). While these services won’t charge you to retrieve your credit info and can offer a wealth of information about what is affecting your credit score along with tips and tricks to help raise it, they, for the most part, don't provide you a FICO score, but rather a score based on the VantageScore model.
The third option is to use one of the free services offered as a credit card benefit. There are many card issuers now offering access to FICO information as a benefit, including most major banks and credit card providers. While these services are handy to check your info, we still recommend signing up for a service such as Credit Karma, as they provide additional tools and a broader picture of your financial situation with data from your credit reports.
How Are Credit Scores Calculated?
Credit scores are complex, built up using your lending history and financial data. And the bad news is, if your score is suffering from some adverse history, it can take time to turn around.
The factors taken into account when determining your credit score, over and above income, are:
- 35% Payment History – Lenders are looking for on-time, every-time customers; late payments represent a higher risk and anything over 30 days will start to impact your credit score.
- 30% Amounts Owed – This number is not calculated on the raw sum of money owed, but on your utilization rate or the proportion of available credit vs. how much is being used. Lenders are looking for utilization rates under 30%, which will earn you a better credit score. Even better, keep your utilization under 10%. Note: This doesn't mean you should carry a balance — your utilization is reported on a monthly basis, typically when your statement closes — it shows how much you utilized in the past month.
- 15% Length of Credit History – Calculating the average age of your credit accounts, this takes into account the duration of time you’ve had accounts open and includes your oldest and newest accounts. It also factors in how often accounts are in use and the length of time that individual accounts have been open.
- 10% New Credit – If you’ve opened multiple accounts recently, or made inquiries (known as hard pulls), this is where they show. Your credit score will traditionally dip when it shows a number of new accounts added in quick succession, particularly if you don’t have a long credit history. Note: The impact of these inquiries starts to fade immediately and over the course of one year those dips from inquiries are gone.
- 10% Credit Mix – This takes into account your entire lending mix, including items such as credit cards, personal loans, finance accounts, mortgages, and external factors such as being a guarantor or authorized user on another account.
Other Tips to Manage Your Credit Score
Always Pay Your Account on Time – The single most important factor in managing your credit score is paying your accounts on time and never letting payments fall behind, or even worse, defaulting. Setting up auto-payments, alerts, and using personal finance software such as Mint can help to get payments made on time, keeping your accounts in good standing.
Keep Credit Utilization Under 30% – And then aim for under 10%. Studies have shown that to achieve the 800+ credit score that is the nirvana of rewards travelers, keeping credit utilization ratios under 10% will give you the best possible chance of maxing out your credit score and could potentially save you thousands in interest over the lifetime of an account.
Downgrade Rather Than Close Accounts – Closing accounts can have a negative impact in two ways, first by changing your credit utilization ratio, and second by affecting the average age of your accounts. So rather than cancel a credit card, look to downgrade to a card from the same provider that is a better fit for your current financial position.
Set Regular Times To Assess Your Credit Score – One of the worst things you can do for your credit score is to ignore it. Setting bi-monthly or quarterly dates to monitor and assess your credit score will help you plan how to raise it, and stay on top things that may be impacting your score by catching them early. It’s also an excellent way to prevent fraud by keeping on top of open accounts and applications and allows you to quickly intervene if you think something adverse has been added to your account by mistake.
Correct management of your credit score is one of the most important factors in a successful rewards travel plan giving you the best possible chance at scoring the best deals and interest rates, potentially saving you thousands of dollars in interest over the life of each credit account.
We highly recommend setting up accounts with services like Credit Karma to monitor your credit scores and create a plan to get your score as high as you can. You’ll find a good credit plan gives you the best possible chance of success when taking on rewards travel as a hobby.
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