Points and miles can help you stretch your travel budget to the max, but can this lucrative hobby spoil your credit?
This question is asked by thousands of smart consumers every year. Even though travel rewards can help you earn free travel, it's smart to make sure they don't ruin one of the most important factors of your financial health: Your credit score.
Fortunately, it's possible to pursue rewards without hurting your credit for the long run.
How Is Your FICO Score Determined?
Before we dig into the best ways to keep your credit score intact, let's talk about where that score comes from. (Also, what is a credit score anyway?)
Most lenders measure your credit health using your credit score-the three-digit number that represents your credit standing. Most credit scores fall between 300 and 850-the higher your score, the better off you are.
The most popular credit score lenders use is called a FICO score. According to myFICO.com, your FICO score is determined using the following criteria:
-Payment History: 35 percent
-Amounts Owed: 30 percent
-Length of Credit History: 15 percent
-New Credit: 10 percent
-Credit Mix: 10 percent
As you can see, the main factors that make up your FICO score are your payment history and how much you owe. Ideally, you would always pay your bills on time. Not only will this help your credit stay in good standing, but it will help you avoid late fees, too.
And if you're going to pursue credit card rewards, the amounts you owe on credit matter a lot.
Because rewards credit cards charge higher interest rates than traditional cards, you should never pursue rewards if you have credit card debt. If you carry a balance now or plan to, you'd be better off choosing a low-interest credit card or avoiding credit cards altogether.
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How to Earn Travel Rewards without Spoiling Your Credit
Now that you know how your FICO score is determined, it's easy to see how you can pursue rewards without spoiling your credit. Here are some tips that can help you wade into rewards without doing permanent damage:
#1: Pay all your bills on time.
Pay all your bills early or on time to avoid late fees and dings to your credit score.
#2: Don't carry a balance.
Never pursue rewards while you're in debt. Pay your balance in full every month.
#3: Don't open too many new cards at once.
Since having too much "new credit" can hurt your credit score, you should strive to open new cards only when necessary.
#4: Keep old cards open.
The length of your credit history makes up 10 percent of your score, which is why you should keep old cards open-even if they don't have a balance.
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Final Thoughts
It's perfectly normal to worry about your credit score as you consider adding a travel credit card to your wallet. While good or great credit can help you qualify for the best rates on a home mortgage or any other loan, poor credit can make your financial life impossible.
The good news is, travel rewards don't have to spoil your credit, nor will they if you make wise credit choices.
Like anything else in life, credit card rewards are safe to pursue in moderation. And with a solid plan in place, you can finally enjoy the rewards you hear others rave about.
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