Free Travel Part 2 - Credit Cards

[Edit: I've moved! If you're interested in up-to-date info on free travel, check out Free Travel in Your Twenties]

Every frequent traveler will tell you the same thing - credit card sign-up bonuses are the most lucrative way to earn free travel. They're certainly not the only way to earn miles, and not even my favorite way. But in terms of most miles for the least time and money, nothing beats it!

I'm going to provide a basic recap of my current strategy in this area. I highly recommend checking out Frugal Travel Guy (FTG) before making any moves - it was his blog that first got me hooked, and he's also quite the veteran when it comes to protecting your credit and earning miles. I've also sent him several emails when I've had questions - each time he has responded quickly (less than an hour!) and in great detail. I'd recommend him to anyone! Plus if you use the credit card links on his site, he gets a referral bonus. I'm not set up (and don't plan on ever being set up!) for receiving bonuses, so by all means pass on your support to him!

Alright, first things first. Straight from FTG, your credit is your most important asset! No amount of free travel is worth bad credit. This takes both discipline and patience - lots of them! Be especially leery if you have a big purchase planned in the next two years - cars, houses, going back to school, anything you'd take out a loan for. There seems to be some debate on what the exact cutoff for the best loan rates is - somewhere between 700-760, so I'm aiming to stay above 760 just to be safest.

My first step was to find out my credit. For that, I went to Credit Sesame. It's not very detailed and only represents one of the three major credit report agencies, but it's free and gives you a good idea of your credit score. Now here are the basics of how this works:

Credit card companies want to have their cards used by people with good credit, so they offer sign-up bonuses directed at those people as incentive. This means if you have good credit, you get good rewards. But the converse is also true - you need good credit to get good rewards. If you're not in the upper 700s, I'd recommend skipping this section and researching how to increase your credit. Focus on other ways to earn points in the meantime! Another thing to consider is that almost every card has a minimum spending requirement - in order to get the bonus, you have to spend at least X dollars in Y months. Make sure you won't have any issues meeting this with only your day-to-day expenses (it sort of defeats the purpose of free travel if you spend an extra $1000 that you wouldn't have normally just to get 50,000 miles).

Guys like FTG have this down to a science - carefully monitor their credit scores, apply for one card per major bank (AmEx, Chase, Citi, etc) every 90 days, and bring in hundreds of thousands (if not millions) of miles per year. Add in the possibility of business cards or cards in your spouse's name, and the options rack up even higher! All those trailing zeros can be pretty tempting, but I'm testing the waters a bit rather than jumping right in. My plan for now is to get one card at a time - that way I can see for myself how my credit is affected, I can easily hit the minimum spending requirement before applying for the next one, and I don't have to worry about the consequences of coming across a dream house or needing to replace a car before my credit has recovered.

This technique is also most lucrative for beginners - while high, there is a limit to the number of applications you can submit. Eventually you'll have (or at one point have had) every major credit card available. There are options such as reallocating debt to buy you more time at this point and you should be able enjoy several years of free travel using this method, but it's not an infinitely sustainable system. Taking things slow has its risks as well - the airline/frequent flyer industries change pretty frequently, and it's generally a safe assumption in life that changes tend to be not in your favor more often than not (points sitting in your accounts will generally go down in value over time rather than up). Still, I'd like to save some of that earning potential for further down the road.

Your credit score will drop a few points for each inquiry (every time you apply for a credit card). The average age of your credit accounts plays into your score, so depending on what credit history you already have, it may drop a little more or less. On the other hand, how much you're borrowing vs how much you have available is also factored in (in other words, the percent of your total available credit that you're using) - by adding a credit card your total available goes up, so your score should increase some from this. The combination of these things usually results in a fairly small change in your overall credit score, but that's another reason I'm sticking with one card at a time. I want to see for myself what will happen in my specific situation, especially when my credit is between 760 and 800 - not an overwhelmingly large margin.

As far as what card to apply for, I recommend heading to FTG for a breakdown of the best of what's currently available. Personally, I just received the Chase Sapphire Preferred. So far I love it, and it seems pretty consistently to be in the top two picks of frequent travel bloggers - the other being the Starwood Preferred Guest credit card by American Express. However, the sign-up bonus drops tomorrow morning (4/3/12) from 50,000 points to 40,000. Still a good option in my opinion, and there's lots of other blog coverage out there as to why, but you'll need to do a bit more research to see what best fits your financial situation.

The last topic I wrestled with on the credit card was the annual fee. I've never had a card with a fee before, so again I was pretty hesitant. Many frequent travelers will spend any amount of money as long as the miles per dollar are high enough - and for many of them it seems to work. However, I don't travel nearly enough (a few days a month at most) to guarantee it will pay off. I try to think of it like groceries - sure, paying $200 for $1000 worth of coupons is a great deal. But if I typically only spend $50 per year (I wish), then I don't really care how good the savings are over twenty years - I'm not willing or able to quadruple my budget up front in exchange for a wallet overflowing with discounts.

After having a drawn out internal debate with myself, I finally decided to go with my first annual fee credit card. Here's why... First, the fee is waived the first year - one free year of earning bonuses. Second, at the end of the year I have the option to cancel the card before next year's fee is due. Another option that people have had varying success with is calling the card company and asking them to either waive/reduce the fee or provide a retention bonus (such as another 10,000 miles, similar to the sign-up bonus but smaller, to keep the card another year). Finally, this particular card had a fee of $95. I've currently spent $0 on this venture, and this is the only cost I've committed to (and even then, not really committed since I could always cancel the card, trading a small credit hit in order to avoid the fee). Given the sign-up bonus and my current spending habits, this card will earn me (varying greatly on how I redeem the points) a conservative three free domestic flights this year!!

For being a fairly lengthy post, I barely even scratched the surface of even the little bit that I've picked up in the last few weeks... If you're really wanting to pursue this, you're going to need a lot more resources beyond what I'm providing!. Here's where I'd start:

Frugal Travel Guy - specializing in credit cards and sign-up bonuses
Boarding Area - click 'Our Bloggers' to see several different takes on frequent flying
MileValue - a newly started blog taking a highly analytic approach to earning miles

While today's post covered the biggest payoffs, my next post will cover the most obvious - earning miles/points through travel! Tune in next time...

Update: Want to see the current best offers? Follow the link on this page!