The Importance Of Travel Credit Cards
Updated: Feb 6, 2019
Credit cards are one thing people sometimes fear for the wrong reason, kind of like gluten, (many people don't understand exactly how either work or what they are). In this post, I'm going to explain how credit works and the benefits of having a credit card. If you're familiar with how credit works you can skip the following sections!
How Credit Cards Work
A credit card looks the same as a debit card but works in a slightly different way. Instead of taking money directly out of your bank, a credit card takes that money from your line of credit. A line of credit is the amount of money you're approved to spend on your credit card. Say you apply for a Chase Credit Card and your application gets accepted, with a credit limit of $5,000. That means if you go make a $300 purchase, you'll have $4,700 left on that credit line.
Why Many People Don't Like Using Credit Cards
A good amount of people dislike credit cards because it allows the user to spend money they don't actually have. If you aren't financially responsible, this can lead to debt. When you swipe your credit card, money isn't coming out of your bank, but rather comes from the bank that provides that credit card. Each month you are required to pay a set minimum amount back on that credit card. The golden rule when using credit cards is to never spend more than you have. If you always follow this golden rule, you'll never find yourself in credit card debt! Many people chose to pay off their credit card balance in full at the end of every month, to avoid paying any interest. When you use a credit card responsibly, it can be a great financial tool that comes with many perks, including a boost to your credit score!
What Is a Credit Score and How is it Determined?
A credit score is essentially a way for financial institutions to judge how likely you are to pay off debt. If you have a high score, you'll be more likely to get a large loan at a low-interest rate. If your score is low, you might not be able to get a loan or will get a much smaller one at a high-interest rate. The United States has three national credit bureaus that each report on consumers to develop a credit score. They are all similar but do have some slight differences. To read more about that you can check out this helpful article from myfico.com. Credit is determined by a few factors: 35% payment history, 30% amount owed, 15% length of history, 10% new credit, and 10% types of credit. As you can see, the largest factor is payment history. This means if you always pay your bills on time, you'll have the largest boost to your credit.
When you apply for a credit card, that bank is going to look at how much you make, if you have other credit card debt, (and how much you owe if you do), along with other smaller factors such as the types of credit you use, how often you apply for credit and how far back your payment history goes. If you are confused by any of this or would like to know more about credit and credit cards, check out this article by moneyunder30.com here.
The Benefits of Having A Credit Card
There are many benefits of having a credit card, depending on the type. Cash-back is a big one, with many cards offering anywhere between 1-5% cash back on purchases. Fraud protection is another big one. Most credit cards offer 0% liability if your card is compromised. This is incredibly helpful is your credit card is stolen, as you won't be personally liable for any charges. Most credit cards have multiple layers of fraud protection to make online shopping much safer, too. A third benefit and perhaps the biggest is a boost to your credit score. If you use your credit card responsibly, your credit score will greatly reflect that and it will become much easier to secure an auto or mortgage loan. There are also many travel benefits! Travel Insurance is a huge one. Many credit cards come with free travel insurance, especially for things like renting a car. Co-branded credit cards, such as the CITI AAdvantage Executive Card, can give you perks such as complimentary airport lounge access, the ability to earn airline miles with purchases and many more. There are many co-branded travel credit cards out there, each with unique benefits.
The Importance of Travel Credit Cards
Now that we've talked about how credit works and the benefits of having a credit card, let's discuss how it can improve your travel experience and really bring down the cost of your next vacation. Sign up bonuses can be huge, and virtually all travel credit cards offer some type of sign up bonus for spending a certain amount of money in the first few months. If you time this right, you can end up getting a lot for spending money you do anyways. Let's see what this could look like.
For this example, we're going to use you. You don't mind, right? Let's say London is a place you've always wanted to visit. However, travel can be expensive. To save some money you decide to pick up the CITI AAdvantage Platinum Select World Elite Mastercard. This American Airlines co-branded credit card has a sign-up bonus of 70,000 miles after spending $4,000 in the first four months. You move all your bills over to your credit card instead of paying with your debit card or bank a count, and make sure to pay the balance every month. Now after a couple months, you have 70,000 American Airlines miles for spending you would've done anyways! More than enough for your roundtrip ticket to London. (Or enough to fly one way in business class).
This is one small example of how travel credit cards can save you money. The IHG credit card could land you 80,000 points after spending $2,000+ in the first couple of months. (enough points for a nights stay at The InterContinental Bora Bora Resort Thalasso, which is normally $1,000+ a night). Whether you're looking for airline miles, hotel points, or anything else, there's a travel card out there for everyone.
Have a place in mind you'd like to go? See what cards can get you there!