Have you ever dreamt of going to Europe, but the cost seemed too prohibitive? Or wanted to fly home at a moment's notice without paying an arm and a leg?
Travel doesn't have to be out of reach. Travel hacking is the process of accruing airline miles and points through reward programs and credit card sign-on bonuses.
Many travel hackers are able to redeem their miles for free flights all over the world. Travel hacking typically involves signing up for credit cards with lucrative bonuses during a promotion period and closing them after accruing enough miles for free travel.
While free or low-cost travel may seem enticing, travel hacking isn't for everyone. Here's what you should know before you begin.
1. Many travel rewards cards have an annual fee and high interest rates.
Travel hackers often sign-up for various credit cards to maximize their return and redeem free or low-cost travel, including flights and hotels. You typically need to have excellent credit in order to qualify for rewards cards.
But airline credit cards that offer hefty sign-on bonuses typically have an annual fee and high interest rates (often between 13 and 23 percent). In some cases, card issuers may waive the annual fee for the first year as part of a promotion.
Once you've accrued enough miles to book your next trip, you're left with a couple of options after the fee-free year is up:
- You pay the annual fee, which could be between $59 and $95 per year.
- You close the card before the year is up.
If you opt to pay the fee, you may or may not get enough rewards from your regular spending to justify the annual fee.
On the other hand, closing your credit card could have a negative impact on your credit score, as it could affect your average age of accounts as well as your credit utilization ratio, or how much credit you use compared to what's available to you.
For prospective travel hackers, it can be important to determine whether it's worth keeping a card with an annual fee or whether you'd rather risk a potential hit to your credit score. If you decide to cancel the card before you're charged an annual fee, don't forget to mark that date on your calendar and cancel before then.
2. Travel rewards credit cards can have high spending minimums.
Along with the annual fee, travel rewards credit cards can have high spending minimums. In order to get the bonus points, you may need to be prepared to spend a lot of money.
For example, some cards may require you to spend thousands of dollars within a fixed period of time (say, three or four months) in order to get the bonus points for use on travel. If you don't ordinarily spend that much money in a short amount of time, you could be tempted to spend more than you have to just to reach the minimum spending requirement.
Experienced travel hackers have learned to put everything -- from their bills to their mortgage -- on their credit cards. Some have resorted to "manufactured spending" in order to meet the spending requirements.
According to travel blog The Points Traveler, "Manufactured spending is the process of purchasing something that is the equivalent of cash -- such as gift cards, money orders and other items -- with a miles/points credit card. The goal is to earn miles or points for these purchases and then quickly and easily liquidate the funds and use them to pay back the credit card."
While experienced travel hackers may have mastered the art of meeting spending requirements, if you're not careful, you could find yourself spending more than you typically do in order to get the bonus or lose out on points altogether if you don't meet the requirement.
3. Not all rewards cards are created equal.
Travel rewards cards often have different spending requirements, interest rates and reward structures.
Before you travel hack, check to see if the card you want to choose can actually get you where you want to go. Do your research ahead of time and understand how many points or miles it takes to go to your desired destination and if it's convenient using your local airport.
In addition, you'll want to read the fine print so you're clear about annual fees, blackout dates or any restrictions.
Since the point of travel hacking is to actually redeem your miles, it can be a good idea to think of where you want to go first and then figure out which card is best to help you get there.
4. Travel hacking isn't for everyone.
Travel hacking may seem like a great way to game the system, but let's be clear: Travel hacking isn't for everyone. Travel hacking probably isn't right for you if:
- You have less-than-excellent credit and may not be approved for a rewards card.
- You're already in credit card debt and may get into additional debt.
- You don't plan on paying your balance in full each month.
- You end up spending more than you would with cash.
If you're not careful, opening and closing credit cards to accrue miles can be a game that affects your credit score negatively and leads to debt. Generally, each time you open a credit card, there is a hard inquiry on your credit, so opening multiple cards could potentially lower your credit score.
"Newbies might be tempted to jump into this, open up multiple credit cards at once and just go crazy with it. I always urge caution and suggest that people start with one credit card and see if this is for them," says Brad Barrett, founder of the travel-hacking site TravelMiles101.
You may also be tempted to spend more subconsciously to earn the rewards, which could lead to credit card debt. "No amount of 'free travel' is worth getting into debt," Barrett warns.
Travel hacker Lee Huffman flies his whole family around the country for very little money and receives various reward perks, but emphasizes the importance of maintaining good credit while travel hacking.
"Your credit score is one of your greatest assets, so you need to protect it wisely. Be careful not to go into debt just to earn miles. The rewards are not worth the annual interest rates that credit cards charge you," he says.
Travel hacking can be a great way to save money on travel if you have good credit and pay your balances in full each month. However, it can also be a strategy that backfires on you if you don't know how to play the game.
Before deciding to travel hack, it's key to understand how it works and monitor your credit score.
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