That's the estimated number of miles driven on long-distance road trips in the summer months between Memorial Day and Labor Day. Perhaps equally as astounding, a family of four spends an average of $4,380 on a single vacation, according to American Express.
A large chunk of those miles driven and vacation budgets spent will likely fall onto credit cards. People who are savvy with their credit card budgets stand to reap the most benefits, whereas people prone to overspending their budgets are missing key opportunities to beat their financial goals.
In the previously recorded Facebook Live segment below, The Motley Fool analysts Michael Douglass and Nathan Hamilton discuss 10 credit card essentials to help cardholders get the most value from their cards before fall arrives. Tune in to learn more, then consider reviewing The Motley Fool's picks of the best travel credit cards and best credit cards of 2017 to find a card that may fit your needs.
Michael Douglass: Let's talk through some credit card tips and thinking about how to approach summer travel budgeting, and how a credit card can potentially help with that. First off, rule No. 1, set a realistic summer travel budget.
Nathan Hamilton: Yeah, that's an important one. You mentioned before the people spend around $4,600 on the average vacation for a family. So, if you think about taking two trips during the summer, for most people, that's going to blow through their budgets. So it's a matter of setting a realistic travel budget. Why that makes sense is, if you're using credit cards as the currency to pay for that trip, you definitely want to spend within your means and not incur interest charges just go visit Mickey Mouse or anything like that. So, some things to look at, maybe tips -- set a spending alert, open a single travel credit card to consolidate all of your purchases on that card to make it easy to manage your finances. Just some very simple tips that warrant mentioning and could help people out.
Douglass: Absolutely. I think that idea of a specific car that you primarily use for travel makes a lot of sense, because it centralizes all that spending into one place, so you aren't like, "We spent $1,000 on this one thing, that's on one account, $500 on this other account." That mental load can become very difficult to bear over time, so it's important to have that all consolidated into one place, so you can be like, "Cool, we spent $2,000 and we're going to spend another $1,500 for this," or what have you. That can really help with that. Let's also talk about cash back, specifically for gas for road trips. There's some cards that are offering as much as 5% cash back, which is bananas.
Hamilton: Yeah, there are some out there with rotating bonus categories where they will increase it to 5% for, say, a quarter, no annual fee.
Douglass: You have a quarter in the summer.
Hamilton: Yeah, so if you look at it, driving coast-to-coast and looking at the cash back you can earn, 3-5%, it's about $30. So, it's not a game changer, but it is $30, that pays for a meal on the road, it pays for dinner, it pays for tickets into a water park, any national park, anything like that. So, if you can reduce the cost of your trip just by using the right credit card and getting cash back for those rewards, that definitely makes sense, and I would suggest for people listening to not overlook that potential, even though it's somewhat small.
Douglass: Sure. And it's one of those things where it's money you're already spending. If you were planning to take a road trip -- we're based in Alexandria, Virginia, so if I'm visiting my grandma in Missouri, it's a long road trip. That's a lot of money for gas that I'm going to have to kick out the door regardless. In that case, it makes sense for me to go ahead and recoup as much of that as I can.
Hamilton: Yeah. It's no different for summer travel than regular everyday life. These are tips that apply to more than just the next three months.
Douglass: Yeah. Let's talk about, this is something I found a little bit surprising, paying inside the gas station.
Hamilton: I don't do this, but I came across some research in looking at the rollout of the pin transactions, which essentially get rid of the skimmers out there that can steal your identity when they put that cover over the ATM or the gas terminal, and you don't know that you're scanning your card into a skimmer and someone is stealing your identity on the other end. What's happened is, with gas stations, the rollout was initially intended for 2017, so gas stations were required to comply. But that's changed, the rollout has been pushed back to 2020. So, if you think about it, the only way to guarantee that you're not getting skimmed in that off case scenario is pay inside. So, when you're at a gas station earning your cash back rewards, it may make sense to get out of the car and walk inside and prepay.
Douglass: Sure. And plus, let's face it, you're probably going to want to do a bathroom break anyway.
Hamilton: Yeah, the kids are screaming.
Douglass: You probably need an extra soda to keep you going, maybe some peanuts or that beef jerky, I love that stuff.
Hamilton: I know, what's a road trip without it?
Douglass: [laughs] That's true. I don't know, I'm curious, what's your favorite road trip food?
Hamilton: As a kid, I remember the beef jerky snuff, it was almost like tobacco chew that you put in, I love that. But I would say, it's probably going to be Combos, the pretzel Combos.
Douglass: Yeah, those are pretty darn good.
Hamilton: What about you?
Douglass: Probably pretzels and M&M's, if you put them together. I mean, also you can get --
Hamilton: Don't they make --
Douglass: -- pretzel M&M's, which are even better. But sometimes you can't find those in the gas station or grocery store, and you can just buy a bag of pretzels, but a bag of M&M's, eat them together, it's a good time.
Hamilton: Not sponsored by pretzels and M&M's today.
Douglass: [laughs] Yes, to be clear. So, let's hop back in. Credit utilization. This is a thing that matters not just in terms of making sure that you're budgeting well, but also in terms of your overall credit score. First off, credit utilization basically means, how much of the debt available to you that you're using. If you have a credit card within a limit of $2,000, and you're spending $200 a month on it, then you have a credit utilization ratio of about 10%.
Hamilton: Yeah. Why it matters, there's a few different reasons. One is, for the summer, people are more likely to buy houses during the summer. It's a hot time in the season. And if you're getting a mortgage, you want to do everything possible to increase your credit score. One of the fastest ways to increase it if you have a high credit utilization ratio is to pay off debt and bring that ratio down. If you can get to 0%, or 10% utilization, that is going to favorably influence your score. So, it can result in a lower mortgage rate. And beyond just the summertime, beyond home buying, it goes to show for every time of the year, using your debt smartly, which is what credit utilization is measuring, is important. So, keeping it below 10% will influence your credit score the best.
Douglass: Yeah. It's not just about gaming the system, trying to get those 20 extra points or however much it might be for your credit score. I think the really big thing here is, let's say, for example, you're about to buy a house, or you're about to go on vacation. You want to have some flexibility. Buy that house. Maybe you want to get a sofa. If that's going to happen, you want to have all your debt paid off so that you can have those funds available, or something like a 0% balance credit card or something like that, so you have that opportunity to take advantage of that stuff so that you can buy, whether it's a vacation or a sofa or whatever. So, making sure that you are as under-leveraged as possible gives you that flexibility, and that's a really powerful and beautiful thing. It's something that we often look for in companies, when we're evaluating them as investors. And certainly, I think when we're thinking about our personal finances, we need to think about it kind of the same way.
Hamilton: Yeah. Debt is not a bad thing. Using it the wrong way, and us, we can be our own worst enemies with debt.
Douglass: Absolutely. Let's also talked about cutting vacation costs. This is a stat you threw out -- you can reduce it by as much as 11% with a sign-up bonus. Walk us through that math.
Hamilton: AmEx's research shows that you spend $4,580 on the average vacation. If you look at sign up bonuses on the market, there are some that run for $500-plus.
Douglass: That's 11%.
Hamilton: Yes. And when you apply that to travel, you have your 11% discount, and the requirements are generally going to be that you spend $3,000-4,000 within a three-month period. So, paying for your vacation travel, you earn rewards on it, you also earn that bonus and you can net that against your costs, and there you go with essentially an 11% discount. And just to point out, the fact that if you do have, in your life, a big purchase coming up, or if you have a family vacation, think about possibly opening a credit card that can fit that need, and of course establish a relationship with the card beyond just the sign-up bonus, because there are benefits to being a member, for more than just the rewards and so forth. But, it's something that, you're throwing money out the door if you're not using it that way.
Douglass: Yeah, in a lot of ways, folks who pay cash are subsidizing those of us who are using cards. If you can get that couple percentage points, or even in some cases substantial sign up bonuses it makes sense to get them as long as you're paying off your credit card monthly.
Hamilton: Yeah, that's always the caveat, always.
Douglass: Yeah, that's the key thing. You just have to use that smart. But it can really be a big benefit to you. Let's talk as well about bonus travel points. People think about, insert airline SkyMiles card, and they think, "Oh, I can get a 50,000-mile bonus with this," or something like that. But frankly, travel rewards aren't just about airlines. They can also be about gas, or a lot of other things.
Hamilton: Yeah. The categorization of travel, depends on the card, but for the most part, it's going to go beyond airfare and apply to taxis, trains, ferries, any sort of --
Douglass: Hotels, sometimes.
Hamilton: Hotels, of course, that's a big one that will cost you a lot of money. But, yeah. Looking at it is, placing your entire purchase on that travel card is going to get you benefits in terms of rewards and also in the insurances that are offered.
Douglass: Yeah. If you think about it, let's say you have a hotel, you're staying in, let's say, Paris for a week and a half. Lovely city, really gorgeous, particularly in the fall. And you're paying $200 a night, so that's $2,000. If you're able to get 2-3% back, that's $40-60. Now, is that an enormous amount of money? No. But it certainly covers a solid dinner at a brasserie while you're there.
Hamilton: Good room service.
Douglass: Yeah, that too. So, there's a lot of ways that you can use this to defray a little bit of these costs. None of these are going to be fundamental game changers, but a little bit of rewards that you're using time over time and over a long period of time can really help benefit your overall financial picture, if you use it correctly.
Hamilton: Yeah, absolutely.
Douglass: Let's also talk about APRs and interest rates. This really highlights the importance of paying off your credit card as quickly as possible and as consistently as possible.
Hamilton: Yeah, this applies for the people that are carrying debt, and of course it extends beyond the summer. The Fed recently raised rates again, this was on top of two or three rate increases in the past year or so.
Douglass: And possibly more on the way.
Hamilton: And possibly more on the way. What it means for credit card specifically is, credit cards have a variable APR. That floats with a base prime rate, which is influenced by what the Fed sets for the target rate. Now, we've seen credit card APRs already creep up in the first six months of the year, and with the recent change, that could lead to more increases. Any small percentage jump when you're already sitting at very high double-digit rates, for most credit cards, is going to have a big impact on your ability to pay down that debt, especially if you're paying the minimum payment each month.
Douglass: Right. The fact of the matter is, we've talked before about reasons why people carry debt. Sometimes people think that you have to hold a balance on your credit card to boost your credit score. That's not the case, don't do it. The other thing that I've also heard people say is, "If I want to get the rewards, I have to carry a balance." That's also not true. And when you think about it, the math is really working against you, because if you're getting 3% cash back, or even on some things like maybe gas, 5% back, you're paying an 18% APR, you're losing 13% on those purchases. That's a great way to enrich the credit card company, and not yourself.
Hamilton: At your expense.
Douglass: So, definitely something to be thinking about. I strongly recommend against carrying debt, beyond your monthly billing cycle. Let's also talk about travel insurance. If you place your entire air fare purchase on your credit card, you can get travel insurance. So, first off, what is travel insurance?
Hamilton: It's going to cover you in case of lost luggage, accidents, be it death, accidents, loss of hearing, loss of limbs, they even include in some of the accident coverage. You also have delay and cancellation and so forth. But, if you look at it, about one in six Americans' trips are delayed, either based upon illness or natural disasters or some odd reason. So, if you travel any certain number of times, in almost every scenario you're going to run into some sort of delay or cancellation at some point.
Douglass: Statistically speaking, it's highly likely.
Hamilton: It is very highly likely. And that's where insurance comes into play. When you're sitting at the airport and that event does happen and you don't have the insurance, you regret it. When you do have it, you're very thankful. And the way to do that is place your entire purchase -- if you look at the fine print with many travel insurances, if you split it among cards, you're not going to get the benefits. You have to put the full purchase, be it air fare, hotel, anything, when it comes down to it. So, it's important to keep that in mind, because if you do want the benefits, which, in the worst case scenario, can be several hundreds of thousands of dollars worth of insurance for premium cards, you have to put that whole purchase on the card.
Douglass: Yeah, absolutely. And to be clear, you can also purchase travel insurance. But, if you can get it for free, why wouldn't you do that?
Hamilton: Yeah, if you're not paying a fee on the card, if it's something that is a perk anyway of a car that you are paying a fee for, if you already have it, take advantage of it.
Douglass: Exactly. Why pay for something when you can get it for free? Proverbially. Let's also talk about car rental insurance. This is the thing that I think trips people up all the time. You go to, insert car rental company, and they say, "Do you want the minimum? Do you want the maximum? Do you want the in between?" And I think a lot of people's eyes glaze over, and they're like, "Gosh, what do I pick?"
Hamilton: And I think they purposefully try to confuse people to get them into the solution they want, which is probably more money in their pocket. Looking at basic insurance that's going to be covered with some credit cards, you get what's called a collision damage waiver, which is not a full coverage. When you go to more premium cards on the market, you get what's called primary insurance coverage. That's a deeper insurance coverage, be it loss of vehicle, it doesn't have to go on your insurance. If your insurance doesn't cover the full amount with other cards you're on the hook for those damages, but that's not the case for primary insurance. Just make sure to pay attention to the fine print if you are applying for a credit card to get that insurance for that reason, and also when you're at the stand renting a car, it's important to look at what specifically is covered and what isn't, and ask questions when needed.
Douglass: Yeah, it's a tough thing, and it's something that I think a lot of people have to work on. Maybe something we can put some content out there on, and get something precise to help people out with. Let's also talk about debt reduction. It's funny, because we've talked about all this extra spending that often happens in the summer, but let's face it, summer ends Labor Day-ish. A month-and-a-half later, you have Halloween. Then it's Thanksgiving.
Hamilton: The holidays are here.
Douglass: Yeah, exactly, and it all goes from there. So, there's a lot of spending that tends to happen. The last time I looked at numbers, holiday spending by house, it was pretty close to four digits, which is probably not shocking for any listeners who have had to buy for all their cousins. The thing is, it's really important to think about how you can reduce debt this summer. Let's talk about that a little bit.
Hamilton: Yeah. It's just a matter of planning ahead. As you mentioned, in three months, when that's over, the holiday is upon you pretty much immediately when it comes down to it. You'll see credit cards start to promote a good number or more of cash back cards as that season approaches. It's just a matter of paying attention to the details and setting a holiday budget. I know we're talking about summer credit card tips, but if you can get out of debt to free up some finances for what will be inevitable purchases in the holiday times, it's definitely important to do so. Not only do you have the credit utilization benefits that we talked about before in decreasing your ratio, but you're going to have more money left in your bank account at the end of the day, reduces stress levels, there are all sorts of benefits beyond financial benefits when getting out of debt.
Douglass: The other thing that I think a lot of people tend to think about is, they'll tend to say, "Sure, I will go on this financial diet for three months," or, "I will do this thing for this other thing."
Hamilton: Are you talking the Atkins diet of finance?
Douglass: [laughs] The no-gas type, yeah.
Hamilton: And then you balloon in size after?
Douglass: Right. I think it's often helpful to think through what your long-term financial health looks like, and what you're really looking to do there. And summer is a great time, particularly if things are a little quiet around the office and you have a little more vacation, it's a great time to relax and think through, "What do I want and how can I put myself in a financially better spot for the rest of the year?" So, it's a great time to start that sort of thinking, and figure what the answers are.
Hamilton: It's the day-to-day actions, it's not just one single event that creates your future, just as with investing. It's a bunch of correct actions that set you on the right path. It's not one single winner and then all of the sudden you become a millionaire. That's just not how it happens, and it's not how it happens with managing your credit card debt.