Middle Age Miles

Credit Card Basics

This article is part of Middle Age Miles’ series, “How to Get Started” with Credit Cards, Points and Miles.

Credit Card Basics

  Table of Contents

  • Basic Advice and Assumptions
  • Will Getting Multiple Credit Cards Kill My Credit Score?
  • Personal & Business Credit Cards
  • Card Issuers (Banks) & Payment Networks (Card Types)
  • Co-Branded Credit Cards
  • Amex Charge Cards
  • Store Cards
  • Card Application Velocity Rules & Card Limits
  • Other Credit Card Characteristics & Benefits
  • Authorized Users
  • What Do I Consider When I Decide Whether to Apply for a Credit Card?

Basic Advice and Assumptions

Let’s jump right in to our “How to Get Started” guide by going over some fundamental information about credit cards.  We’re going to assume that you have some basic knowledge, like knowing the difference between credit cards and debit cards.

First things first, let’s start with some basic advice and assumptions.  If you can’t follow these rules, please stop now and focus on your personal finances before you jump into credit cards, points and miles.   [In the meantime, you can enjoy all of our travel destination articles on Middle Age Miles, and you can collect miles and points through the many other earning activities besides using credit cards!]

Here are our basic rules for using credit cards toward travel rewards:

  • You must pay your credit card bills on time and in full.  If you are being charged interest at high credit card rates, you’re losing money.  You’ll be paying more in interest than the value of any points and miles you will earn.
  • Don’t spend more money just because you’re earning points.  Once you see what kind of rewards and travel value you can get from credit cards, it will be very tempting to spend more money to get more rewards.  Don’t do it.  What we’re trying to do here is get the best return out of what you’re already spending, not to spend more.  My good friend JBTx calls this the principle of “unmodified behavior.”
  • Don’t apply for any credit card within 6 months before you apply for a mortgage (or while your mortgage application is pending).  Mortgage lenders see recent applications for additional credit as negative signs, and they can and will charge higher interest rates on your mortgage.  A higher interest rate on your mortgage will cost you far more than the value of any points and miles you can earn.

Will Getting Multiple Credit Cards Kill My Credit Score?

This is the number one question I get when I talk with people about using credit card programs to help get travel rewards.  The short answer – as long as you pay your credit cards on time and in full – is No.

The longer answer is that there will be variations in your credit score over time based on your credit card activity, and sometimes your score will go down temporarily. But the majority of your credit score is based on two factors – your payment history, and your credit utilization (that is, the percentage of your available credit that you have actually used/borrowed).  So long as you pay on time and don’t habitually max out your credit cards, your credit score should be fine.

To get a full understanding of credit scores and how they are calculated, read this informative article from creditcards.com:  FICO’s 5 factors: The components of a credit score.  In short, the 5 elements of your credit score are:

  • Payment history
  • Credit utilization (the percentage of your available credit that you have actually used)
  • Length of credit history (sometimes called Average Age of Accounts)
  • New credit (including applications for new credit)
  • Credit mix (it is positive to lenders for you to have a variety of credit that you have managed well, such as mortgages, car loans, credit cards, etc.)

When you’re applying for and using credit cards, common actions that result in negative changes would be:

  • An application for new credit will bump your score down slightly.  This is a short-term impact that will fade within a few months.
  • A new account will bump your score down slightly.  This reduces your Average Age of Accounts.  This is a short term impact, as the longer you have the card, the higher your Average Age of Accounts will become.
  • Having a high balance on your card when your statement closes will bump your score down.  This gives you high Credit Utilization, which is a negative.  Running a regular high balance on your credit card will continue to cause a negative impact.  You can eliminate this impact by paying off your balance before your statement closes.

But these types of negative changes should be small, and they should be temporary.  Over time, your score will probably increase as long as you handle your credit responsibly.  You will be gaining favorable payment history, you’ll be getting more “available credit” that will help lower your credit utilization percentage, and you will show that you can handle a mix of credit obligations responsibly.

I’ll even share my own personal example here.  Over the past 2.5 years, I’ve obtained 27 credit cards (17 personal and 10 business), plus I have been added as an authorized user for 3 more cards where my wife is the primary card holder.  I currently hold 23 credit cards as the primary cardholder (14 personal and 9 business), plus I’m an authorized user on 4 cards, plus I’m the primary cardholder on one store card.  I’ll venture to guess that I’m in the top 1% of all people in terms of getting credit cards during this time period.  Yet, my credit score remains excellent:


Personal & Business Credit Cards

There are important characteristics and distinctions between personal and business credit cards that you need to know.  Most of this section is focused on business cards.

Personal cards are straightforward – you apply for the card under your own name and social security number, the card has your name on it, and you are personally responsible for all charges on the card (including charges made by authorized users, if any).

Business cards have characteristics that you might not expect, so be sure to read this section carefully.  Business cards can be very important and very helpful in terms of generating points and miles that you can use for travel.  You want to be able to get and use business credit cards if at all possible.  Here’s what you need to know:

(1) Do you have a business?  There is a very good chance that the answer is yes, even if you don’t think you have a business.  For credit card purposes, pretty much anything you do to earn money other than work for a paycheck or collect government benefits qualifies as a business.

(a) A “business” for credit card purposes is not the same as a “business” for legal purposes.  You do not have to have a formal corporation, limited liability company (LLC), or any other formal business form to have a “business” for credit card purposes.  If the “business” is just you personally, it is a sole proprietorship, and you can apply for a business credit card using your personal name as the name of the business.

[UPDATE 11/2018: A strong recent data point from a Chase application reminds us that if you have a sole proprietorship, you definitely should apply using your personal first and last name only as the name of the business, and not use a doing-business-as (d/b/a) name such as “Tadlock Consulting.”]

(b) A “business” for credit card purposes is not the same as a “business” for tax purposes.  You do not have to have a Federal tax Employer Identification Number (EIN) to have a “business” for credit card purposes.  Likewise, you do not have to file a tax return for a business in order to have a “business” for credit card purposes.

(c) Likewise, charges that you put on a business credit card do not have to be “business expenses” that would qualify as deductions for tax purposes.  Taking this a step further, as a practical matter I think it’s fair to say that you can put any charge on a business credit card.

(d) Examples of legitimate businesses for credit card purposes include: (i) working as an independent contractor or freelancer; (ii) reselling items on eBay; (iii) selling homemade items; (iv) renting your home or apartment on Airbnb (or renting it directly to someone, for that matter); and (v) doing any odd jobs for which someone pays you.

(e) As you can see, what qualifies as a “business” for credit card purposes can be quite broad.  It is far broader and more lenient than what is required for a business for legal or tax purposes.

(2) On business cards, you can apply using just your SSN, or you can apply using an EIN if your business has one (in which case you will also have to provide your SSN).

(3) On business cards, regardless of whether you apply with just your SSN or whether you use an EIN, you should expect to be personally responsible for all charges (including charges made by any authorized users).  The card agreements generally require that you commit to be personally responsible; they generally do not permit only the business to be responsible.

(4) When you apply for a business card, the credit inquiry will appear on your personal credit report and impact your personal credit score.  However, if you are approved for a business card, the account will not appear on your personal credit report and will not impact your personal credit score (unless you fail to pay and the card issuer has to start collection proceedings against you).

(5) These types of business cards that you can apply for and get are sometimes called “small business cards.”  They are different from the corporate cards that employees of big companies may be issued to pay for their work-related travel, and they should not be confused with corporate card programs.

Card Issuers (Banks) & Payment Networks (Card Types)

Let’s take a moment to review card issuers and payment networks so that we’re not confused by the difference:

Card issuers are generally banks.  You apply for a credit card through the card issuer, you make payments to the card issuer, and the card issuer services your account.

Some of the largest card issuers are:  American Express, Bank of America, Barclays, Chase, Citi, Discover, and US Bank.

Payment networks process the transactions.  For the most part, you won’t have direct dealings with payment networks (unless they are also the card issuers).  But the payment network is very important, as different payment networks can have different rules for their cards.

The largest payment networks are:  American Express, Discover, MasterCard, and Visa.

American Express and Discover process their own transactions.  Thus, for Amex and Discover cards, the card issuer and the payment network are the same.

A card issuer can issue cards with different payment networks (or just one).  For example, Bank of America (B of A) issues some cards that are MasterCards (for example, the B of A Travel Rewards card) and some cards that are Visa cards (for example, the Alaska Airlines MileagePlan Visa card).  Similarly, Barclays, Chase and Citi all issue some MasterCards and some Visa cards.

Co-Branded Credit Cards

Many of the credit cards we’ll be interested in at Middle Age Miles are co-branded cards.  These cards can help you earn miles in a specific airline’s frequent flyer program or points in a specific hotel chain’s loyalty program.  One example is Bank of America’s Alaska Airlines MileagePlan Visa card that we just mentioned.  You apply for this card with B of A, and you make your payments to B of A.  But spending on this card will earn you miles in Alaska’s frequent flyer program.

Importantly, once miles or points are earned with a co-branded card and the miles/points show up in your loyalty program account, those miles/points will stay in your loyalty program account even if you cancel the co-branded credit card.

Amex Charge Cards

American Express has a few cards that are “charge cards” rather than “credit cards.”  The difference is that charge cards must be paid off each month.  That is, you can’t carry a balance on a charge card.  (Amex complicates this by offering a “Pay Over Time” feature on some of its charge cards, but we will ignore this for now.)  Amex charge cards include its business and personal Platinum cards, and its business and personal Gold cards.

For the most part, for purposes of Middle Age Miles, we can ignore the difference between charge cards and credit cards.  The biggest reason this may be important is that Amex generally limits people to having 5 Amex credit cards at any one time, and charge cards do not count toward this limit.

Store Cards

Many stores have credit cards that you can only use at that particular store or chain.  For purposes of Middle Age Miles, and for all strategies to generate points and miles to use for travel, it is almost always a bad idea to get a store card.  Store cards’ benefits are very limited, and applying for them can prevent you from obtaining far more generous benefits from other cards.  We will largely ignore store cards for purposes of Middle Age Miles.

Card Application Velocity Rules & Card Limits

Almost every credit card issuer has its own rules on how often you can apply for new cards, how many recent card accounts you have, and/or how many of their cards you can hold at one time.  Every issuer’s rules are different.

Some of these rules are hard-and-fast.  Middle Age Miles has prepared a more detailed article summarizing the known rules for the major credit card issuers, which you can access here – Credit Card Limits & Velocity Rules.  In addition, this situation is complicated by the fact that each credit card application is subject to individual underwriting.  Thus, an application may be denied, even though it does not violate any hard-and-fast rule.  This is at the discretion of the card issuer.  As a result, sometimes the hard-and-fast rules can be difficult to know precisely.

The most important card velocity rule that you need to know from the start is Chase’s “5/24” Rule.  Basically, the 5/24 Rule is that Chase will not approve you for certain cards if you have 5 or more new personal credit card accounts within the past 24 months, from any issuer.

The 5/24 Rule applies to all of Chase’s own cards (that is, cards that are not co-branded cards), including personal and business cards.

This includes all of Chase’s “Ink” business cards as well as personal cards such as the Sapphire Reserve, the Sapphire Preferred, the Freedom, and the Freedom Unlimited.

The 5/24 Rule also applies to some of Chase’s co-branded cards.

The 5/24 Rule applies to Chase’s United and Southwest cards, and also to its Marriott personal card.

However, the 5/24 Rule does not apply to other Chase co-branded cards.

The 5/24 Rule does not apply to Chase’s Hyatt, IHG, Ritz-Carlton, British Airways, Aer Lingus or Iberia cards, and it also does not apply to its Marriott business card.

[UPDATE 11/2018: Recent data points suggest that the 5/24 Rule now applies to at least the Hyatt and British Airways cards, and perhaps to all of the cards listed above. Also, Chase has closed the Ritz-Carlton card to new applicants.]

The Chase 5/24 Rule is probably the most strict, most restrictive hard-and-fast rule in the points-and-miles world.  Therefore, if you’re starting out in using credit cards to earn points and miles, knowing the Chase 5/24 Rule and optimizing your strategy in light of it is absolutely crucial.  There is a high chance that your best strategy will be to get valuable Chase cards first, while you are “under” 5/24, before branching out to other card issuers.  [That said, (a) individual circumstances may call for a different strategy, and (b) you will need to be careful not to apply for too many Chase cards too quickly, or Chase may shut you down.]

Other Credit Card Characteristics & Benefits

Here are a few other credit card characteristics and benefits that are important:

(1) Sign-up bonuses.  Many cards will offer sign-up bonuses.  They generally come in the form of some number of points or miles after charging a certain amount to the card within a certain time period.  For example, in July 2018 the public offer for the Chase Sapphire Reserve card is 50,000 Chase Ultimate Rewards (UR) points, after you spend $4,000 on purchases in the first 3 months from account opening.

Sign-up bonuses are usually the fastest way to generate high numbers of points and miles to use toward your travels.  Again using the Sapphire Reserve as an example, you could redeem those points toward airfare or hotels at a rate of 1.5 cents per point – meaning that the sign-up bonus on this card is worth at least $750.  You may be able to achieve even higher value, which we’ll discuss more in our “Redeeming Points and Miles” article.

Our series on Point Values will help you evaluate what each sign-up bonus is worth.

(2) Points earning rates & category bonuses.  Different cards earn points and miles (or cash back) at different earning rates, and many cards have certain “bonus categories” where you can earn multiple points or miles per dollar of spend on those categories.  Staying with the Sapphire Reserve as our example, this card earns 3 UR points per dollar of spend (3x) in the Dining Out and Travel categories, and 1 UR point per dollar of spend (1x) on everything else.  Given that each UR point can be redeemed for 1.5 cents toward travel, each dollar spent on this card for Dining Out and Travel will return 4.5 cents of travel value.  We can use these category bonuses strategically to maximize our travel value return.

(3) Card benefits.  Many credit cards come with a suite of benefits, many of which are travel-related and some of which can be quite valuable.  For example, several premium credit cards include complimentary access to certain airport lounges.  Other cards include annual travel credits, reimbursement for Global Entry or TSA Pre-Check fees, collision insurance for rental cars, or elite status in a hotel program.

Perhaps my favorite card benefit comes with Chase’s Ritz-Carlton Rewards Visa Infinite card.  This card includes a benefit of $100 off when purchasing airfare for 2 or more people on US domestic round-trip flights on most major carriers (but not Southwest).  This benefit alone saves us hundreds of dollars per year, more than making up for the card’s annual fee.

(4) Annual fee.  Some credit cards have an annual fee; some don’t.  Those with annual fees generally come with higher levels of benefits.  Each year, you’ll want to analyze whether your card’s benefits justify its annual fee.  If not, the card should be canceled.  [We expect to have many articles on Middle Age Miles focused on the annual keep-or-cancel decision, such as these, Keep or Cancel – Chase British Airways Visa Card and Keep or Cancel – Barclays Wyndham Rewards Visa Signature Card.]  Some premium credit cards come with high annual fees but also have credits that help offset the fee.  For example, the Sapphire Reserve has a $450 annual fee, but it also comes with an easily-usable $300 travel credit that can offset much of the annual fee.

(5) Annual card rewards.  A few cards come with annual card rewards that you will receive each year on or near your card anniversary date.  For example, the B of A Alaska Airlines card has an annual Companion Fare – the first person pays regular fare for an Alaska Airlines ticket, and the companion can fly for $99 plus taxes and fees (generally $121 all-in).

(6) Foreign transaction fees.  Many cards now come with a “no foreign transaction fee” benefit, which can be extremely useful if you’re traveling internationally.  For cards that do charge foreign transaction fees, the rates are usually 2.7% for Amex and 3% for everyone else.

Authorized Users

Almost all credit cards allow you to add authorized users (AUs) to your account.  Importantly, the primary cardholder is financially responsible for all charges made by all authorized users on the account.

For the most part, if you’re using credit cards for points-and-miles rewards, you do not want to add authorized users for any personal card.  And especially, you do not want to add your spouse as an authorized user on any personal card.  The reason is that many times, each spouse can get separate credit card accounts, even for the same card, so a couple can reap twice the rewards.  Adding a spouse as an authorized user to a card may “count” against that spouse in terms of the velocity rules and card limits that we discussed earlier and can potentially preclude that spouse from getting other valuable cards and bonuses.

There are some exceptions to the general “no authorized users” rule.  One is that a card benefit may extend to authorized users and be so valuable that it’s worth adding an AU.  For example, the Citi American Airlines Executive card comes with an AU benefit of access to Admirals Clubs.  This benefit is so valuable that I am an AU on Philly’s card.  Another exception could be that you might want to add a minor child as an AU, to start building the child’s credit profile and give them a higher credit score once they reach adulthood.

Finally, adding an authorized user for a business card is much less of an issue for points-and-miles purposes.  These cards will not show up on the AU’s credit report and should not cause any negative points-and-miles-related consequences for the AU.

What Do I Consider When I Decide Whether to Apply for a Credit Card?

This is a question that can be analyzed at many levels.  If you’re going to get into the points-and-miles world, you will want to have a definite strategy that takes into account the card velocity rules and limits as well as the more general factors we’ll list below.  You’ll always want to make sure that your card choices align with your travel patterns.  You want to put your efforts into earning points that are valuable for you.

In general, though, you’ll want to consider:

  • Sign-up bonus – This includes evaluating the value of the miles or points you’ll earn, as well as evaluating your ability to meet the spend requirements to earn the bonus.
  • Point earning rates & category bonuses – This also includes evaluating the value of the miles or points you’ll earn.
  • Card benefits
  • Annual fee

For Middle Age Miles’ purposes, we’re not considering the interest rate or other fees.  We’re assuming that you will pay your bills in full and on time each month.

Considering all of the factors, we think you’ll find that there are many cards that provide valuable benefits that will help you achieve your travel dreams.  Part of our mission is to give you the information to help you choose.  We expect to have plenty of articles with our perspective on what cards are most valuable, like this one, Persistence Pays – Approved for the US Bank Altitude Reserve Card!  We’ll also have articles analyzing what card or cards would be good for specific situations, like What Card to Get? Student Leaving for Study Abroad Program (Case Study).

We hope that you’ve found our guide to Credit Card Basics helpful.  Please enjoy the other articles in our “How to Get Started” series!

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