5 Beginner Mistakes

Being scared of annual fees

The above points wasn't an argument to avoid expensive credit cards just because of the fee. For many starting out, spending $550 right away for a credit card may indeed seem crazy. They want to test out the travel credit cards by starting with no annual fee or at least low annual fee cards. But just looking at the sticker price, is the same mistake as #1 - no research. Sometimes it can make more sense to get an more expensive travel credit card because you'll get way more value from it. And other times it won't, so again, do your own research. But take a classic example below. 

Many travel hackers recommend getting a Chase Sapphire Preferred or Reserve credit card to start their journey. See  a quick summary below. 

If you just look at the sticker price, the Chase Sapphire Preferred seems like the better option since it's cheaper and still has the ability to transfer points out to partners, which is the most important feature. BUT,  if you factor this secret Chase Sapphire Reserve hack in addition to the credits you might use, then the numbers change drastically.  Just because the card has an annual fee, doesn't mean you can't get way more value out of it. 

Getting X credit card because you're loyal to X airline/hotel/store

This is probably the biggest mistake I see for beginners into the travel credit card scene. The assumption is that if one flys a certain airline, then that company's credit card is the best option for them. Most of the time this is a wrong move for a  whole host of reasons. 

• You limit your points earning. Most co-branded credit cards offer 2-4% back when you make purchases with that co-branded retailer - from your classic Macy's to American Airlines. Not only is that low, it's rare for someone or even a household to spend enough money at a specific store or airline to make it worthwhile. And when I say enough, I mean tens of thousands of dollars per month. Why? Because there are better all-around cards and eventually credit card churners realize the best earn potential is through opening new credit cards because of their sign-up bonuses that can get them 10%+ back on their purchases. 

  • In terms of airlines, most cards offer 3% back at that airline and you'd be stuck with using those miles for travel on that airline. Instead getting a card like the Chase Sapphire Reserve, which earns 3% on ALL travel AND allows you to transfer points to a multitude of airlines (or even cash back if needed) provides way better value. And then if you have the American Express Platinum, you get 5% back booking directly with the airline, so why would you bother with an airline credit card? 

  • For store credit cards, they're even worse to get since many times the earn rate is similar to a 2% cash back card and sometimes you can't even redeem your store points for statement credit. Sometime it is just store merchandise using an arbitrary standard of points that can devalue at any moment. If you do spend a lot at one store, you could consider getting the US Bank Shoppers Card which earns 6% at two stores or your choosing. Plus there are other alternative strategies that might take one extra step, but allow you to gain more value than from a store card itself. 

• On the redemption side, not all points currencies are the same. Would you rather have 1,000 Chinese yen, or 1,000 US dollars? Even though they're both 1,000 of something, the US dollar has more value and buying power. In the same way, different point ecosystems have different values. For example, we flew to Brussels last year in United Polaris business class. We didn't book on United because that flight was 80,000 points one-way per person. Instead, we got the exact flight by booking through United's partner, Turkish Airlines, for only 45,000 points per person. Make sure you understand the points ecosystem you're going into. 

• You get sucked into the status wheel. Most travel co-branded credit cards offers some helpful perks - priority boarding for airline cards and late chekc-out for hotel credit cards. And then most cards allow you to spend X amount of money to get higher on their loyalty status track. While most of these benefits are indeed helpful, they might not be necessary and can suck people into spending more money or wasting time. People will talk about how they need to take just one more trip at the end of the year to fulfill some status requirement or spend $X on their co-branded card without taking a look at the value they're actually getting. Is that higher potential for a free upgrade really that worth it? The answer may be yes for some, but either way do the calculations, and having a co-branded card might swing you too much to "yes."

If you want to know when it might make sense to get an airline credit card, read our deeper write-up here. 

Incorrectly estimating the value of your credit card perks

Congrats, you've made it this far - you've done your research and know what credit card will give you the best value... but wait! Are you calculating the value correctly? Unfortunately in the credit card world annual fees, credits, and earn rates have certain numbers, but that doesn't mean those are the true value...

Overestimating Value

A common occurrence with analyzing a card's credits is to overestimating the actual value you're getting. For example, the American Express Gold credit card comes with a monthly $10 dining credit that many users apply to Grubhub orders. That total of $120 credits per year helps recoup the entire $375 annual fee. However, Grubhub prices are sometimes inflated at certain restaurants and maybe you're not someone that would use Grubhub normally. Therefore, even though you're getting a 120 dollar value from the card, the realistic value of what you would pay for may be slightly lower. 

Another thing to overestimate is the earn rates on credit cards. Take the American Express Gold credit card again. It earns 4x back on dining, while many other cards, even those without an annual fee, can earn 3x. Is that extra 1x really going to earn you that many more points? If you in theory spend $20,000 on dining in one year and used a 3x dining card instead, you'd only be losing out on 20,000 points or "$200" which is definitely helpful to have, but not a make or break situation in this ecosystem. 

Underestimating Value

On the flip side, don't underestimate the value of the card at its whole. The Chase Sapphire Preferred is $95 and some users aren't able (or choose not) to use the $50 travel portal credit. However, the ability to transfer Chase Ultimate Reward points is an ambiguous, yet the main value from having the card. By transferring out your points, even something as low as 10,000 already can potentially save you more than $100 (and the annual fee). Then cards also have various benefits like travel protections, warranties, fraud detection, and more that may be of value. 

Not understanding how credit cards affect credit score

The last mistake we see is a poor understanding of credit scores and then how much credit cards affect your score. Read the full write-up here.  By understanding how companies calculate credit score, you can not be afraid of applying to new credit cards, as well as become cautious of applying.