From the get-go, when Mike and I were asked to lay down our priorities in terms of lifestyle and life goals, traveling was near the top of our list. It goes without saying that traveling comes with a price that can interfere with our equally important goal of gaining financial independence. It’s hard to commit to a trip across the world when I know I will come back to an ever-growing student loan. So I am so excited to share with you guys a way that allows us to travel the world, without breaking the bank.
We do something called travel hacking.
I first discovered Travel Hacking on Choose FI’s Podcast, Episode 9: Travel Rewards; How to Travel the World for Free (here). In less than an hour, they had me hooked! I remember coming home and re-listening to the entire episode with Mike. We forwarded the podcast episode to our core group of ten friends, in the hopes that they also would like to join us in this adventure, so that we may travel the world together. We continued to study Travel Hacking by taking the free Travel Miles 101 course. We reached out to our financial adviser to ask if it was too good to be true, and were happy to learn that he, too, dabbles in this life hack, and that it would be a very beneficial thing for us to do. I highly recommend anyone interested in traveling the world for (nearly) free to first listen to the podcast episode (in order to get a taste of what this entails), and then to take the free Travel Miles 101 course. I think it would be best to leave all the nuances to the pros and to simply refer you to these two sources, giving all credit where credit is due.
What is travel hacking?
Travel Hacking entails using the benefits of Credit Card Reward Programs in order to gain points that can be used to buy flights, hotel stays, and even car rentals. The idea is to open credit cards and hit the minimum spend criteria in order to attain the massive 40k, 50k, 80k points. These points are incentives for the new cardholder to hit a certain spending within a certain amount of time (usually 3 months) since opening the card. So that is exactly what we do. There are multiple strategies in order to do this, which the sources detail really well, and which I won’t touch on in this post. If you’d like to learn some of these strategies, I refer you to the Travel Miles 101 course.
Keep in mind that while this is extremely useful and beneficial for traveling, it can be destructive if attempted by people who have not achieved disciplined, financial responsibility. The credit card companies win if you open credit cards, purchase products with them, and do not pay off the total amount in full. This leads to high interest rate charges that will lead to more financial harm than good. It also isn’t good if it results in you spending more than you would normally. The card holder needs to be well-restrained. Mike and I treat the credit cards as if they were debit cards. We don’t increase our spending for the sake of gaining more points. In due time, the points will come.
Alternatively, the credit card companies will also win if you fail to hit the minimum spending. You would have opened a credit card for no reason! This requires a very organized person who will keep track of minimum spends, and dates the credit cards were opened, and dates when minimum spending should be reached. So how do you responsibly meet minimum spend when your day-to-day activities do not meet it? There are many ways to ensure you hit your target spending before the time is up. You can use the remaining amount needed to buy grocery or gas gift cards, which could be used in the future. This is a way to guarantee getting the massive point-payout without reckless spending. Another way to meet minimum spend is to prepay bills, such as electrical bills for upcoming months. Having the bills off your mind is a big plus.
Why is this so great?
Imagine this scenario. You open a credit card that requires a $3000 minimum spend in three months. When you spend $3000, you will get a points equivalent to $1000 in flights, which is a 33% rate of return. You can’t get that anywhere! If you were to get that in a taxable investment account, you’d have to pay taxes on your gains. This is 100% tax-free. And may I say that 33% rate of return is not the best rate out there. This should be even more appealing for people who are in higher tax brackets. For people who make six figures, you are sitting in a 25% tax bracket, and if you add to that health insurance, FICA, etc., you may even be approaching closer to 40% marginal tax. For you to take a $5k vacation in a year, you will need to earn $7, 8, 9k to pay for that vacation. With travel hacking, you can do that for free. You can then keep that $7k available to other aspects of your life (aka student loans).
What’s the catch?
Our biggest concern, obviously, was credit rating. Even though we have absolutely no interest in signing up for even more loans right now, mortgages and car loans included, we still don’t want to completely obliterate our really good credit scores. Turns out, there is a very minimal impact on your credit score. Credit scores will go up and down, naturally, within 10 to 30 points within a normal month anyway. That’s just how credit scores work, and it is not a precisely fixed number. Now, if the people attempting travel hacking are financially responsible people, so their credit score would likely be around the 800 range. The maximum that it has dropped for some travel hackers is 25 points, which is irrelevant, because a score of 750 is sufficient to guarantee you most loans. And the funny thing is, these scores jump right back up, because you are constantly paying (in full) multiple credit cards. By spending responsibly, travel hackers can increase their credit score to more than what they started with in the course of a few years. Yes, initially, the hard pull when you apply for the credit card leads to a 2-5 point drop, but it is temporary and it is completely gone within 18 months. Now if you are, for some reason, extremely worried about your credit score or you have a low credit score, or you have plans to take out a mortgage or a loan in the next year, then this strategy is not for you. Do not do travel hacking if for any reason, whether psychologically or financially, you need your credit score to be a certain number.
For Mike and I, we started this journey with decently high credit scores. We decided that, even if our scores dropped as much as 30-50 points, would we be okay. The answer to travel hacking for us was a whole-hearted yes. If the trade-off is $6-7k worth of travel (for free), that would save us $10k (pre-tax) a year, which we can then attribute to other assets or to paying down debt. Since we have no plans to buy a house in the next year, we are not very worried with the short term negative effect it could have on our scores. And our credit scores would still be considered good, if not great! We are more excited about the long-term benefits.
So where has that led us?
We discovered Travel Hacking in October 2017, which is very, very late compared to a whole community of travel hackers who have been doing this for multiple years! It has been almost 5 months.
For 2018, we are able to book the following flights, for free.
Mexico City, Mexico
San Francisco, CA
Melbourne, Australia (from Sydney)
Christchurch, New Zealand (from Melbourne)
Christchurch, to LAX
Pending trips: Costa Rica
The best part?
Slowly, our friends opened up to the idea of travel hacking too! Our trip to SF reunites our group of ten college friends, and the pending Costa Rica trip is being planned among a group of us, as well. It has increased our ability to grow with people we care about, and to spend time with them, and to just see the world.
Travel Hacking is fantastic, but not for everyone. So learn about it, to see if it’s right for you!
For the curious, my top 3 favorite travel rewards cards are:
These are my referral links and I posted them here to try to connect as many people as possible to the best credit cards for travel hacking. If you know someone who loves to travel, especially young college students and new grads who may feel (like we did) that it would be impossible to travel, do share this post with them. You could change their life!