One of the hurdles some people face when considering the travel-hacking game is properly understanding credit cards. Many err on the “credit cards are evil” side of things, and prefer not to deal with them at all. Others rush in headlong and quickly find themselves in over their heads. Consider this story as an poignant example.

Know your limits

Please don’t get a credit card if you know it will cause you to get into debt. You’ll be far better off without it. Rewards are great, but they don’t matter if you’re spending more and/or going into debt to accrue them.

If you have difficulty managing your spending and/or tracking your purchases, consider wisely the choice to use a credit card. If you end up $2,000 in debt after accruing points for a “free” family trip to Hawaii, your trip is suddenly no longer free.

The commandment of properly using credit cards

If/when you do have a travel credit card (or any credit card), here are 5 commandments you should abide by:

  1. You shall not miss a payment – This one is the biggest. Missing a payment will result in a late fee, not to mention have potential implications for your credit score for missing a payment. If you miss a few payments, you can cause your credit score to plummet. You’ll also be paying the bank needlessly and negating any rewards you’ve gained. Use your card wisely, and don’t accrue more in charges than you can pay off by your payment due date.
  2. You shall not pay interest – Even if you make your payments on time, you will still get hit with interest unless you pay the statement balance in full each month. Do not let this happen! Each time you pay interest you are negating any potential benefit of using you card to earn points, and typically setting yourself even further back than the value of the rewards.
  3. You shall not fail to earn a sign-up bonus – When you sign up for a new card, be sure you understand the terms of the bonus. There will almost always be a spending threshold that you must achieve within a certain time-frame, typically $1,000-$4,000 within the first 90 days. My wife and I have only missed one sign-up bonus, and it was a really sad day when I realized our error. We failed to earn 50,000 Delta miles because I thought the spending threshold was only $1,000 when it was actually $2,000! Do note that fees (such as an annual fee) do NOT count toward the sign up bonus spending requirement! Only net purchases (purchases – refunds) count.
  4. You shall not cancel a card without good reason – You should always have a good reason to cancel a card. It may be as simple as “I don’t want to pay the annual fee.” Remember that the more credit you have can actually increase your credit score (SEE: The 5 Factors that Influence Your Credit Score), generally because it drops your utilization ratio. You can increase your score by keeping accounts open that do not have an annual fee.  As these accounts age, they will improve your score. Do not cancel a card simply because you do not use it much, especially if it doesn’t have an annual fee.
  5. You shall not forfeit rewards by canceling a card – Co-branded credit cards (those associated directly with a loyalty program) generally have rewards that are independent of card membership. That is, they aren’t forfeited when you cancel. For example, once my points have posted from my MileagePlus Explorer card to my United frequent flyer account, they are mine. I would not lose them if I canceled my card. Bank cards are different, however. When you cancel a card, you may lose all the points in your account. Make sure you understand the various program rules before you cancel a card! Sometimes it’s as simple as transferring the points to a partner program, or cashing them out.

Conclusion

I want to reiterate that credit cards are not for everyone. If you have difficulty managing your spending and/or tracking your purchases, then you may want to steer clear of them. If you end up $2,000 in debt after using points for a “free” family trip to Hawaii, your trip is suddenly no longer free.