Do you have a credit card that earns you cash back on your purchases? If you do, I'm guessing you're earning somewhere between 1%-3% cash back on most of your purchases. Not bad! But what if I told you there was a way to earn around a 20% ROI (Return on Investment - I'm an accounting professor so I'm contractually obligated to use fancy acronyms) on your credit card purchases? Do I have your attention now? If I do, keep reading about my experience this summer dabbling in a technique called "travel hacking".
What is Travel Hacking?
Travel hacking - Earning points and miles that pay for future travel expenses by opening specific credit cards that offer huge sign-up bonuses
Here is a typical example of a sign-up bonus: Enjoy a one-time bonus of 75,000 miles once you spend $4,000 on purchases within 3 months from account opening, equal to $750 in travel.
I first heard about this technique a few months ago when listening to the podcast ChooseFI. After listening to a few episodes, I stumbled across Episode 9 - Travel Rewards: How to Travel The World For Almost Free (The Easy Way). After listening to this episode, I thought, "Hey, I need to give this a try!"
***Side Note***
The next section of this article describes my first experiment with travel hacking in the past few months. If you want a much more in-depth explanation of this technique, then I'd highly recommend going to ChooseFI and reading their 6-part blog series called The Ultimate Guide to Credit Card Travel Rewards.
My Experience
After listening to the podcast episode back in February, I decided I was going to try this out during the summer months. The hosts of ChooseFI recommend using a Chase travel rewards credit card as one of their top options due to the flexibility of being able to use their points. Therefore, for my first experiment, I decided to sign-up for the Chase Sapphire Preferred Card. The website NerdWallet agrees by giving the Chase Sapphire Preferred Card a 5/5 rating.
I was lucky in the timing of applying for the Chase Sapphire Preferred Card in late May of 2023. Its normal sign-up bonus is "Earn 60,000 bonus points after you spend $4,000 on purchases in the first 3 months from account opening. That's $750 toward travel when you redeem through Chase Ultimate Rewards". However, Chase was running a special promotion at the time and was offering 80,000 bonus points (the equivalent of $1,000 in free travel) if I spent $4,000 in the first 3 months. I opened the account and started my travel hacking experiment.
Once we received our credit card in the mail, my wife and I used the Chase Sapphire Preferred Card for all our credit card purchases over the summer to meet the $4,000 spending threshold in the first 3 months. A key ingredient of travel hacking is to charge purchases on your rewards travel card that you were going to purchase anyway vs. having to spend extra just to earn the sign-up bonus.
My wife and I are both considered frugal people, so I was a little nervous that we were not going to meet the $4,000 spending threshold in the first 3 months (there are clever ways to get around this that I mention later), but we hit our 80,000 bonus points in early August (the equivalent of $1,000 in free airfare.)
I have no idea where and when we will travel next, but earning $1,000 in free airfare will give us an incentive to travel without worrying so much about the cost of flying.
Q&A
Q: What is the biggest rule of travel hacking?
A: Always pay off your credit card balance in full each month. If you don't, you'll incur interest charges which defeat the purpose of travel hacking. Also, don't spend more money than you normally would just to meet the sign-up bonus.
Q: Won't this hurt my credit score?
A: You might see a slight decrease in your credit score in the short term, but not much. Only 10% of your credit score is based on new credit. Actually, your credit score could eventually increase as long as you are making on-time monthly payments since 35% of your credit score is based on payment history.
Q: Can I get these generous sign-up bonuses?
A: The higher your credit score, the better deals you will receive from credit card companies. Typically, if you have a credit score above 670, you should qualify for most of these offers, but an ideal credit score for travel hacking is 720 or higher.
Q: Who should not try travel hacking?
A: Someone who has a hard time controlling their spending and cannot pay off their credit card balance in full each month. Also, you might want to avoid travel hacking if you are about to apply for a home mortgage. Even a slight, temporary dip in your credit score can trigger a higher mortgage interest rate.
Q: 80,000 bonus points, that sounds like a lot. What is the monetary equivalent of that?
A: For the Chase Sapphire Preferred Card, 1 point = 1.25 cents if your points are used on travel. That's why 80,000 points = $1,000 in free airfare or 60,000 points = $750 in free flights. You can redeem your points for things like cash back, gift cards, or a statement credit on your bill, but the value is not as high as 1.25 cents.
Q: Do your points expire?
A: No, not with the Chase Sapphire Preferred Card or many other travel reward cards as long as your account stays open.
Q: Are there blackout dates for using your points on flights?
A: No, not with the Chase Sapphire Preferred Card or many other travel reward cards. However, most airlines only reserve a certain amount of seats on each flight for those using points to pay for their travel. Therefore, it is helpful to a) book your flights early and b) be somewhat flexible on your flight dates.
Q: What about an annual fee?
A: Yes, the Chase Sapphire Preferred Card has a $95 annual fee. However, the card does come with its own travel insurance. My wife and I have other credit cards, but none of them have travel insurance as a benefit. Often times we will purchase travel insurance if we book travel on a different credit card. However, if we use Chase points to pay for our airfare, we will not need to purchase separate travel insurance which can make up for much of the $95 annual fee.
Q: How can I avoid the annual fee?
A: With the Chase Sapphire Preferred Card, you won't be able to avoid the initial, first-year annual fee. However, Chase has several travel partners (United Airlines, Southwest Airlines, British Airways, and a few others) where you can easily transfer your points at a 1:1 ratio to one of these partners. If you do this before your next annual fee, you can a) transfer the points to one of the travel partners, then b) cancel your credit card to avoid future annual fees.
Q: What if I think I'm going to fall short of the spending requirement to meet the bonus?
A: There are a few clever things you can do to meet your minimum spend without overspending. A) Only use your travel rewards credit card, and no other credit card, during the sign-up bonus period, B) Plan on applying for a travel rewards card just before you are about to make a major purchase or a major bill comes due (property taxes, car insurance, home insurance), C) Buy gift cards with your credit card to stores you frequent often (Amazon, Walmart, etc.) then use those gift cards for future purchases
Q: Do I have to pay tax on my reward bonus?
A: No! That's what makes travel hacking even more valuable. Assume you earned $750 worth of free airfare through your sign-up bonus. That is the equivalent of having to earn $1,000 in gross pay on your job to pay for your travel (assuming 25% is taken out for taxes).
Q: Can I combine points with my spouse?
A: Yes, with the Chase Sapphire Preferred Card and many other travel reward cards. For example, assume next month my wife applies for her own Chase Sapphire Preferred Card and earns a $750 bonus for us spending $4,000 in the first 3 months. Chase allows us to combine my $1,000 with her $750 to equal $1,750 in free airfare. Pretty cool, huh?
Closing Thoughts
This concept of "travel hacking" is new to me, so I'm not trying to come at this as an expert. If you are looking for more expert advice, I go back to my earlier recommendation of checking out the ChooseFI website for a more detailed analysis and other options besides the Chase Sapphire Preferred Card. I just wanted to share with you a technique I recently discovered, how I tried it out this summer, and a few other things I have learned along the way.
For you young adults out there looking to travel on a tight budget, try this out sometime. Who knows, reading this might just turn you into an expert travel hacker!
