Credit Basics

This is perhaps one of the most important things to know before you start. Both of our goals is to minimize damage and preserve our credit score while we earn our reward points. In the words of Frugal Travel Guy: Your credit score is your most important asset.

According to CreditKarma, your credit score is measured by these six factors:

1. Open Credit Utilization
   This is the ratio of your total credit balance vs. total credit limit. The lower the utilization rate, the lower higher your credit score will be. Credit experts advise that you keep your utilization below 30%.
   
   Example: You have three credit cards that have a total spending limit of $10,000. You do not want to charge more than $3,000 each month to those three credit cards.
   
   
2. Percent of on-time payments
   If you can't pay it, don't spend it. Even just a couple of late payments will knock your score down significantly. Travel hacking is NOT for you if you are unable to pay off your statements in full each and every time.
   
   
3. Number of derogatory marks
   These include accounts in collections, bankruptcy, foreclosures and liens. If you have any of these, travel hacking is NOT for you.
   
   
4. Average age of open credit lines
   Do not close your oldest credit card. Lenders average the age of all your credit accounts to assess your credit worthiness. Credit accounts include (but are not limited to) credit cards, car loans, student loans and mortgages.
   
   
5. Total number of accounts
   Typically, the more open credit lines/accounts you have, the better your score will be. Open accounts include (but are not limited to) credit cards, car loans, mortgages and student loans.
   
   
6. Total hard credit inquiries
   Hard inquiries are made when lenders check your credit score for the following:

• Auto loans
• Student loans
• Business loans
• Personal loans
• Credit cards
• Mortgage loans 

How Credit Card Applications Affect You

When you apply for a credit card, you automatically create a hard inquiry and your score will drop a few points. However, your score will bounce back in just a few months.

It is recommended that you should refrain from applying for new cards for one year if you are planning on making any large purchases or loans that require credit checks.