How Traveling Can Affect Your Credit

For some people, traveling means pulling out that trusty piece of plastic and charging their way through their vacation.  However, what happens if you’re not able to pay off your balance in full at the end of the month?  This will affect your credit by adding to your credit utilization.  Credit utilization is a factor in your credit score.  It looks at how much credit you have available to you versus how much credit you’re using.  It is recommended to keep your credit utilization ratio below 30%.  With a $1,000 credit limit on a card, you should seek to carry no more than a $300 balance on the card at the end of the month.

It is also possible to accumulate reward points and frequent flyer miles by signing up for and using particular branded credit cards.  This affects your credit.

Before issuing you a credit card, creditors will do what’s called a “hard inquiry” on your credit report.  This is when they check your credit history to decide whether to extend credit to you.  This hard inquiry lowers your credit score by a few points.  Too many inquiries, especially in a short period of time, can indicate to lenders that you may be a riskier borrower.  This results in a lower credit score.

In order to avoid annual fees, some people will apply for a card, use it for the first year, reap the promotional benefits, and then close it before the annual fee comes into effect.  Closing cards can also affect your credit.  If you close a credit card, that reduces the amount of credit you have available to you.  This means that even though the total amount that you owe hasn’t changed, your credit utilization ratio will change.  Let’s say you have two credit cards, each with a $5000 credit limit.  You are carrying a balance of $3000 on one of the cards. With the two credit cards open your credit utilization ratio is 30% (or $3000 out of $10,000 available).  However, if you close one of the cards, your credit utilization ratio is now $3000 out of $5000 available, or 60%.  Closing cards can also affect the age of your accounts, which is another factor in your credit score (older is better).

“Travel hacking” using credit cards can be a tremendous way to score cheap travel and gain reward points for spending money you were planning on spending anyway.  The key is to plan ahead, stay organized, and know the risks of opening and closing multiple credit lines.  This is especially true if you’re planning on doing so in a short period of time.

To learn how to understand your credit report and score and set credit building goals with the help of a financial specialist, check out Apprisen’s Credit Health Education Session.

Happy traveling!

For more traveling and credit tips, click here to check out our Money Minute blog.