Image courtesy of Idea go at FreeDigitalPhotos.net
Here he goes again. That crazy Steve Stewart is about to start a ruckus and make people get very angry by telling it like it is.
You see, I’m the killjoy that’s about to take away all your fun.
I’m the grandpa who isn’t into “hip” things.
I’m the old man who says you should do things the old-fashioned way.
But I’m going to speak the truth, and the truth can set you free (debt free, that is):
Travel Hacking with credit cards is a dangerous trap
Travel hacking has been around for years, but it is growing in popularity because it’s the “in” thing to do. All the cool Millenials are doing it. It’s sexy. And on the surface it appears sophisticated.
In fact, by the time you finish reading this article there will be half a dozen or more travel hackers leaving comments about how great travel hacking has been for them. I have news for you: They are the exception.
For every journalist who has written about their free travel-hacked flight to Europe there are dozens of American casualties thinking they could achieve the same results by churning cards and reaping the rewards. What we find is taking advantage of credit card rewards to hack a trip to the Caribbean takes a lot of energy, a lot of time, and one slip-up will trap us into debt.
Credit card companies know all about our spending behaviors
Why don’t we see advertisements for Debit cards? It’s because Debit cards don’t make money for the banks.
Banks make their millions from luring unassuming consumers into picking their brand of Credit card. They season the deal with cash-back offerings and free airline tickets – and we eat it up!
It’s a bad deal for the consumer. Signing up for a debt product because of the reward program is like buying cereal because of the prize at the bottom of the box – it’s distracting us from the true cost and we end up having a bad taste in our mouth.
They know our behaviors better than we know ourselves. Millions of dollars are spent in research, studies, and collecting big data in order to predict our purchasing patterns and to exploit our weaknesses.
It is for these reasons we should declare complete abstinence and avoid playing their game; otherwise we suffer the consequences – credit card debt.
5 reasons we will lose the travel hacking game
1: They get us comfortable with using their card
Most rewards cards require we spend a certain amount on the card before giving us the prize. As a travel hacker, you use the card for all the normal expenses you can – even monthly utilities and your car payment (which is another problem we can address later).
However, practice makes perfect. We get comfortable using the card and don’t want to have to re-do all the online auto-pay setups, so we keep the card longer than we promised ourselves.
See where this is leading?
2: One free flight leads to spending more money
Learning how to spend ourselves into a free travel-hacked airline ticket did nothing to strengthen our savings muscle.
The benefit of saving a little on airfare can ultimately damage our finances in other travel-related expenses: Rental car, hotels, restaurants, Broadway shows, site seeing, souvenirs, airport parking, kennel boarding, etc; these are all additional expenses we have to pay.
If we don’t save up the cash before going on our free trip then these expenses go back on the credit card – and we get trapped into revolving credit.
3: Your credit is damaged by opening and closing multiple accounts
Hard inquiries and applications affect your credit. If you live a debt-free lifestyle then this won’t concern you, but a travel-hacker is constantly concerned with their score. It affects interest rates they will be offered on the next card, and so-on and so-forth.
4: More credit cards equal more chances for ID theft
How many cards does it take to have your identity stolen? The answer is 1.
I limit my exposure to identity theft to one personal debit card and one business debit card. We also have emergency savings and a buffer of cash in the bank just in case one of our accounts is frozen until our bank straightens things out (which has happened three times, each was resolved in a matter of hours).
How many entry points to identity theft are in your wallet?
5: Travel hacking takes time away from wealth-building
What is wrong with saving up and paying for things?
Why not avoid the distractions of travel hacking altogether?
Instead, we should focus on solid financial principles like living on less than we make, working hard to achieving the goals we set for ourselves, and earning our rewards the good old-fashioned way instead of scamming the system into giving it to us for free.
Reflect on your childhood memory of the first toy or outfit you paid for with your own money. Paying for things without borrowing money is a truly rewarding feeling that can’t be duplicated with a hack.
I urge you to avoid playing the travel hacking game. It’s as dangerous to our finances as a mousetrap with a fresh piece of cheese.
I’ve never understood the allure of using credit cards for travel rewards. And I don’t truly understand travel hacking. Is it where you use one credit card to pay off the other, thus getting travel rewards on both? If so, at some point it has to be paid off with real money, doesn’t it. Otherwise it is simply like the old check kiting schemes. Perhaps I’m not understand the true rewards of doing this, but I’ll take my credit card rewards in cash.
The popular way is to find a new credit card that offers a ton of points after signing up, use the card in the way they require for you to earn the points, then redeem the points and close the card (or not, there are repercussions to your credit worthiness when opening and closing cards).
But you have it right: The bill still has to be paid with real money.
I think most people should avoid the hobby – but not everyone. There are those of us who just put our groceries and utilities on cards and pay it in full every two weeks. My rewards strategy is incredibly boring, but has lead to thousands of dollars in free travel and cash-back over the years. I use it to take my family on vacations that I would take anyway- I just consider the rewards a discount.
I agree with you that it is dangerous, but I don’t agree that it is a game that *everyone* should avoid. The problem is, so many people who think they can handle it truly cannot. It is up to each individual to make that distinction, and unfortunately, too many people don’t make the right decision.
Thanks for the comment Holly.
I’m not trying to convince you to change but I’d like to get your thoughts on something: What if *everyone* did stop participating in cash-back and credit card reward programs? What would that do to the economy? What would that do to the individual’s personal finances?
Do you think there would be any noticeable impact? Forget the impact that would come from completely getting rid of credit cards to go to a debit card or cash-only type system – what if credit cards just stopped offering perks altogether?
I’d love to hear your thoughts.
I discovered travel hacking last year and absolutely fell in love. The $1700 worth of travel credits I redeemed last year took only a couple hours of my time total (and no tax liability either)- easily the best bang for my buck on my time I’ve ever earned.
That said, I’ve never missed a credit card payment EVER, and I’ve never had a debt issue of any sort. Thus, I only recommend hacking for those who can more than handle CCs.
I heard your interview on the award-winning Stacking Benjamins podcast before writing this article. I have to admit, you explained the process very well and presented the facts fairly. Thank you for that.
An informed consumer is the best consumer. Thank you for educating others.
I get why people travel hack, I would not teach the younger me to do so and that’s what makes me against it.
Agreed. I remember having credit cards with reward programs (gosh, that was over 8 years ago) but rarely redeemed them for anything – there just wasn’t enough of a payout to justify all the work.
Then I realized what it was costing business/vendors to process credit cards vs debit cards and realized it increased their overhead by 1-3 percent. Guess where that money came from? Higher prices for us – the consumers.
Top that off with the fact that these “free” tickets are being purchased off the back of the poor consumer who did not pay off their credit card balances and there is now an entire industry I can no longer be a participant of.
Keep it Even Steven. I appreciate you!
We use a travel credit card for everything and pay our balance off each month. It lets us save up for trips that wouldn’t be in the budget otherwise (we’re a single income family living off half of our one income). I haven’t started hacking yet, but I’ve been very tempted lately. I agree that it’s definitely something you should understand fully if you’re considering doing it and I’m not fully comfortable with the idea yet.
Great post, Steve.
I think Stephanie from TheBrokeAndBeautifulLife.com said it best on our podcast: there are a ton of traps embedded in travel hacking. Unless you know what they are, you understand the consequences AND you know yourself well enough to know that you won’t fall prey to the spending problems it can create (and how many people does that leave?)….you shouldn’t do it.
Joe, this post was inspired by a few recent posts about travel hacking – Stephanie’s interview on your show was one of them. She did do a great job posting the warning signs all over the interview. Maybe this was my response – by putting up a bright LED billboard.
For me, there are two reasons to avoid travel hacking (first time using that term):
1.I did get myself mired in debt, and I’m eager to get out of it. (Not due to credit cards, but I avoid any temptation into debt now.)
2. The debt industry profits from those who are stuck in minimum-payment mode. That doesn’t sit well with me.
I do, however, understand why people who are completely on top of things with their finances might want to give it a try. It’s just that many people think they fit into that category, and only a few actually do.
I love your spirit Prudence. It doesn’t sit well with me at all. Games are fun, but inevitably someone becomes the loser. I’d rather sit around a Monopoly board with friends (or Settlers of Catan with @AverageJoeMoney) than a real-life game skewed towards debt.
Awesome post!! I love the analogy of the credit card being cereal and the rewards being the prize at the bottom!!
In all honesty, I tried to play the travel hacking game and did succeed, once. My wife and I flew first class round trip to our honeymoon and only paid $200 in fees and taxes for the tickets. But getting the points was work. I spent hours researching which card to get, which airline to fly, etc. At one point I realized that the card I was using was pointless because the points wouldn’t transfer over to the frequent flier program – the mistake you mention where I got burned. Luckily we were early in the process at that point.
While it was cool to fly for virtually free, the work it took was too much for me. I switched over to a plain cash back credit card. When I cash out the money – usually a statement credit – I take what I would have paid and move it to a travel fund. So, we get the cash and travel for free without having to jump through all of the hoops. Sure it takes longer to amass points – I only use the card fro groceries and gas where I get the biggest cash back – but it works for us and keeps us out of credit card debt.
Thanks for being so honest. Here’s an interesting question: If you were offered a discount to pay for things using cash, would you stop using the credit card to earn cash-back rewards?
Interesting post. I prefer cash-back rewards to travel rewards for reason #2 as well as the extra time and attention involved. I keep the same old card, pay all my bills in full and on time, and without doing anything extra, I manage to get an automatic payment to my mortgage principal each month. Works for me. For those who prefer travel hacking and can handle the responsibility, I don’t see why they shouldn’t, but I agree that it’s not for everyone.
Steve, it was a pleasure sitting next to you at the closing keynote! I am actually working on an article about travel hacking gone wrong and being at FinCon this past week made it difficult to see the down side. I was researching and came across your article! It is right in line with what I thought the downfalls could be. Thanks for being honest about this!
Awesome Aja! Don’t you love how small the world is? It was great meeting you and I can’t wait to read more of your stuff.