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Update: Some offers mentioned below are no longer available. View the current offers here – Starwood Preferred Guest Credit Card from American Express, Capital One QuicksilverOne Cash Rewards Credit Card, Chase Freedom
Travel rewards cards can be incredibly lucrative, and while the best sign-up bonuses often require high credit scores and unblemished borrowing histories, you can still get into the game even if your credit record isn’t sparkling. Today, TPG Contributor William Morse explains how your credit score is calculated, and offers strategies for would-be award travelers with less than perfect credit.
Credit Score Basics
Credit scores affect everything from interest rates on auto loans and your monthly mortgage payment to insurance rates and employee background checks when looking for a new job. The Fair Isaac Corporation (FICO) produces the most well-known personal credit rating, and lenders commonly use this number as the first metric to analyze your risk as a borrower.
The FICO score has a range of 300 (bad) to 850 (excellent); generally speaking, having a higher score makes you a more attractive candidate for a loan. The average credit score is somewhere between 660 – 690. “Good” credit includes any score of 680 or above, and “poor” credit includes scores of about 620 and below. Top-tier or “excellent” credit starts around 740-750, and gives you a good chance of being approved for credit cards and other loans.
Your credit score is comprised of a number of different factors, as shown in the chart below:
The most important factors are late or missed payments and your credit utilization (the ratio of how much credit you’re using to how much credit is available to you). Negative remarks (like a late payment or accounts in collections) stay on your credit report for 7 years. That’s a long time to pay for a mistake and have it be an obstacle to earning points and miles. Fortunately, negative remarks affect your score less and less as they age.
People often mistakenly believe that if you carry a lot of credit cards, you’ll automatically have a low score. However, each new account improves your credit utilization (so long as you’re not carrying significant balances), so having multiple lines of credit can actually have a net positive effect. There are other factors, and I’m not suggesting that you go open a bunch of credit cards in order to improve your score. However, having multiple cards isn’t necessarily a bad thing.
Protecting Your Credit
Travel rewards cards offer great opportunities to collect points and miles, and if you’re brand new to award travel, this beginner’s guide to getting a card can help. However, your credit isn’t something to mess with, and I strongly advise you to pursue rewards cards only if you’re well organized and have sound financial habits. Banks are smart; they offer these bonuses because they (mostly) make money off you, and any interest or fees you pay can easily wipe out the value of your rewards. But if you hit your minimum spending requirements, pay off your balance on time each month without accruing interest and avoid other fees, you’ll come out ahead.
If you have less than “good” credit, it’s likely you’ve already missed payments, maxed out your limits or have judgments on your credit report. Making on-time payments from here on out can help improve your score, but opening more credit cards to collect rewards is not a good way to manage your debt.
That being said, if your credit score suffers from past mistakes that you have since corrected, or if your credit history is simply inadequate to put you in the upper tiers, you can still take part. Here’s how:
Rewards Strategies for Those with Less-Than-Excellent Credit
1. Poor Credit (FICO Score of 550 and Below)
This group makes up less than 10% of all scores, and I’m sorry to say if you land in this range, you probably won’t be approved for a points or miles earning credit card. However, there’s a chance you may be approved for a “secured credit card,” which requires a cash deposit and works similarly to a credit card. Although this won’t earn you points and miles, it can help you build trust with lenders and creditworthiness for the future. I recommend the Capital One Secured MasterCard because it has no annual fee, and by getting approved, keeping your credit utilization low and paying your bills on time, you’ll be establishing credit with a reputable lender.
If you’ve applied for a secured card but keep getting denied, beware that over-applying creates multiple credit inquiries which can have a negative impact. If you simply can’t get approved, I would suggest obtaining a free copy of your credit report to find out exactly what is holding your score down.
2. Subprime Credit (FICO Score of 550 — 620)
Roughly 15% of Americans fall within the “subprime” range. If you’re among them, your score is likely being affected by negative factors such as defaulted loans or credit cards, bankruptcy or foreclosure. While you’ll probably need to wait until your score increases to get approved for the most rewarding cards, there are other good options out there in the meantime.
I would suggest starting with a simple cash-back card like the Capital One QuicksilverOne Cash Rewards Credit Card, which gives you 1.5% cash back on all of your purchases and a 20% statement credit on all Uber rides through next April. QuicksilverOne is helpful if you’re having trouble getting an adequate credit line, since you can increase your limits after you make five on-time monthly payments. This comes with a $39 annual fee.
Another good option is the Barclaycard Rewards MasterCard, which earns 2x points on gas, groceries and utilities, and 1x on all other purchases which can be redeemed for cash back. This card also comes with complimentary access to your FICO score, and reports to all three credit bureaus (Experian, Trans Union and Equifax), providing you the opportunity to rebuild your credit. Best of all, it has no annual fee.
3. Acceptable Credit (FICO Score of 620-680)
With a little less than 20% of Americans fitting this description, this is where you can really start to explore your options. While you most likely won’t be approved for premium travel rewards cards in this range, you can still take advantage of some lucrative offers. Also, by managing your credit closely in this range, you can start to move toward a “good” or “excellent” rating, which can help you save considerably on future loans.
Your goal at this point is to build relationships with top card issuers by making payments on time and keeping your credit utilization low, so that down the road you have a better chance of being approved for more lucrative products. One strong option at this level is the Chase Freedom card, which currently offers a sign-up bonus of 10,000 points (worth $100) after you spend $500 in the first three months. You’ll also get 0% interest for 15 months, no annual fee and an impressive 5% return on rotating categories like gas stations, restaurants and grocery stores, making it one of the best cash-back cards on the market.
If Chase Freedom doesn’t suit your needs, take a look at some other cards that offer 0% APR while earning you points and miles.
Good Credit (FICO of 680-740)
If you have good credit, you’re among the 25% of Americans who fall into this range, which allows you to really start using your credit score to your advantage. While all scores within this range are considered “good” and are only separated by 60 points, a 740 FICO score can command much lower borrowing rates. Still, a 680 score puts you within reach of some of the best credit cards out there.
A great option to start with is the Chase Sapphire Preferred Card, which offers a sign-up bonus of 40,000 Ultimate Rewards points after you spend $4,000 in the first three months. You can also earn 5,000 points for adding an authorized user and making a purchase within the first three months. Those 45,000 points are worth $945 according to TPG’s current valuations. Another great option is the Citi Thank You Premier Card, which currently comes with a sign-up bonus of 40,000 ThankYou Points after you spend $3,000 on purchases in the first three months. TPG values ThankYou Points at 1.6 cents apiece, so the bonus alone is worth $640. Both of these cards comes with a $95 annual fee that’s waived the first year.
You may have noticed a large jump in the spending requirements to earn the bonus for these cards (compared to Chase Freedom and others mentioned above). If you’re climbing back from past credit problems, the last thing you need is to spend $3,000 that you can’t pay back on time. However, if you can meet the spending requirements responsibly, the sign-up bonuses speak for themselves.
Another strong card option for people in this credit range is the Starwood Preferred Guest Credit Card from American Express. Some co-branded hotel and airline cards can be slightly looser about extending credit, because the brand wants to earn your long-term business. Once you have the card and have enjoyed the bonus that comes with it, the likelihood of generating brand loyalty skyrockets. Therefore, card issuers are more likely to approve someone whose credit score is on the bubble. I picked this card because it comes with a recently increased sign-up bonus of 30,000 points after you spend $3,000 in the first three months until September 14, 2015, and it boasts over 30 airline transfer options. The card has a $95 annual fee that’s waived for the first year, and comes with an assortment of new benefits.
Excellent Credit (FICO of 740-850)
Between 35-40% of Americans have a FICO score over 740. In this range, you’re most likely to be approved for the best products out there, including all of the cards on TPG’s list of top 10 current offers. Even if you have excellent credit, the cards mentioned above can be useful to have in your wallet, so don’t discount them.
Don’t Give Up
Remember, if your application gets denied, that decision isn’t always final. I’ve had success by calling the reconsideration line and explaining my situation. Sometimes your applications will be approved or denied instantly by a computer algorithm, but often the decision to offer you credit lies with a real live human. If you’re not approved instantly, give the card issuer a call and explain why you’ll be a valuable customer.
The travel rewards game isn’t just for those with sterling credit. In fact, there are great opportunities to select cards that, when managed correctly, can actually help rebuild damaged credit. Remember not to overextend yourself trying to meet spending requirements, and make sure to practice sound financial habits. Even if you don’t currently qualify for the best offers, with time and careful management you can become eligible. The benefits of improving your credit score extend beyond the points and miles you earn, but those rewards make doing so a lot more fun!