Travel Rewards Strategies for People with Low Credit Scores
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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, we’re going to look at how your credit score is calculated and discuss 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 seven 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.
A New Type of FICO Score
In 2019, FICO unveiled a new kind of numerical system called UltraFICO. This is great for those who have a limited credit history or have had a hiccup in the pas,t as it allows lenders to look at other information from your checking and savings accounts to understand your approach to managing money. For instance, it looks at how long those accounts have been open and whether you have recurring monthly deposits to your savings account. As long as you display good behavior with your bank accounts then you should be able to climb into good or excellent credit score territory.
UltraFICO is an opt-in opportunity, and you have to be willing to let lenders access information about your checking and savings accounts. However, if your credit score has been toward the bottom of the ladder — the upper 500s and lower 600s — the new approach to gauging your creditworthiness can make all the difference to your financial life. If interested, go here to put your name on the list to be among the first to learn more about and use UltraFICO.
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 started with credit cards can help. However, your credit isn’t something you want to take lightly, so you should only 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.
Rewards Strategies for Those with Less-Than-Excellent Credit
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 a ton of points and miles, it can help you build trust with lenders and creditworthiness for the future.
A good option for people in this boat is the Discover it Secured, which gives you 2% cash back at gas stations and restaurants on up to $1,000 in combined purchases every quarter, and 1% on everything else. Plus, at the end of your first year, Discover will match all the cash back you’ve earned that year. The card 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, try obtaining a free copy of your credit report to find out exactly what is holding your score down.
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.
For instance, you could start with a simple cash-back card like the Capital One® QuicksilverOne® Cash Rewards Credit Card, which gives you a flat 1.5% cash back on all of your purchases. 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 card comes with a $39 annual fee.
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. Two strong options at this level are the Chase Freedom and Chase Freedom Unlimited cards. Both of these cards carry no annual fees and can earn you significant Chase Ultimate Rewards points. When you have these cards alone those points are no different than cash back, but if you also have an Ultimate Rewards-earning card like the Chase Sapphire Preferred Card, the Chase Sapphire Reserve or the Ink Business Preferred Credit Card, you’ll be able to transfer your points to a variety of travel partners. TPG’s valuations peg Ultimate Rewards points at 2 cents apiece so you’ll essentially be doubling your return when you pair the cards.
The Freedom card rewards you with 5x points per dollar on up to $1,500 in eligible spending on rotating quarterly bonus categories like spending at gas stations, grocery stores and department stores. New cardholders get a $150 (15,000-point) sign-up bonus after spending $500 in the first three months on both the Freedom card and Freedom Unlimited.
If you’re looking for a card with no annual fee that allows you to transfer your points to travel partners without having to get another card, The Amex EveryDay® Credit Card from American Express is a great option. It earns 2 points per dollar at US supermarkets for up to $6,000 a year in purchases, and 1 point per dollar after that and elsewhere. New cardholders get 10,000 Membership Rewards points after spending $1,000 within the first three months. It’ll likely take a while until you’ll be able to book a coveted redemption like Singapore first class, but you’ll be off to a good start. The information for the Amex EveryDay® Credit Card has been collected independently by The Points Guy. The card details on this page have not been reviewed or provided by the card issuer.
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 terrific option to start with is the Chase Sapphire Preferred Card, which offers a sign-up bonus of 60,000 Ultimate Rewards points after you spend $4,000 in the first three months. Those 60,000 points are worth a whopping $1,200, according to TPG’s current valuations. With this card, you’ll earn 2 points per dollar spent on travel and dining purchases and 1 point per dollar spent everywhere else. You’ll also get perks like primary car rental coverage, trip delay protection and no foreign transaction fees. This card has a $95 annual fee.
Another strong card option for people in this credit range is the American Express® Gold Card. Its 35,000-point welcome bonus after spending $4,000 on purchases in the first three months isn’t as exciting, but it gets you 4 points per dollar spent on dining worldwide and at US supermarkets (on up to $25,000 per year at supermarkets; then 1x), 3 points per dollar on flights purchased directly with the airline or at , and 1 point per dollar everywhere else. That equates to a stellar 8% back on dining and US supermarkets and 6% on airfare according to our valuations. The card’s $250 annual fee (see rates and fees) is higher than that of the Chase Sapphire Preferred, but it also comes with more perks, including an up to $100 airline fee credit and up to $120 in annual dining credits.
There’s also the Citi Premier Card, which currently comes with a sign-up bonus of 60,000 ThankYou Points after you spend $4,000 on purchases in the first three months. TPG values ThankYou Points at 1.7 cents apiece, so the bonus alone is worth $1,020. With this card, you’ll earn a solid 3 points per dollar spent on travel — a broadly defined category on this card that includes gas purchases — and 2 points per dollar on dining and entertainment so you’ll be able to rack up lots of ThankYou points in no time. The card has a $95 annual fee, and unfortunately, you don’t get many perks in return.
You may have noticed a large jump in the spending requirements to earn the bonus for these cards compared to the ones mentioned above. If you’re climbing back from past credit problems, the last thing you need is to spend $4,000 that you can’t pay back on time. However, if you can meet the spending requirements responsibly, the sign-up bonuses speak for themselves.
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 the best travel rewards credit cards. That being said, even if you have excellent credit, the cards mentioned above can be useful to have in your wallet, so don’t discount them.
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. After all, the first commandment for travel rewards credit cards is to pay your balance off in full each month. 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.
If your application is initially denied, that decision isn’t necessarily final. Many people have had success by calling the reconsideration line and explaining their 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.
Featured image by PhotoAlto/Gabriel Sanchez/Getty Images.