Credit Scores

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The question I am asked most frequently is how I manage to protect my credit score from my pursuit of points and miles. (Close second is what it’s like to shower on an airplane.)

In order to better explain this, we need to better understand credit scores in the first place.

Credit Scores

Three companies in the United States – Equifax, Expedian, Transunion – track and report your credit worthiness for all banks, lenders and otherwise interested parties. To do that, they compile an ongoing report tracking your personal information (names, addresses and employers), each of your loans and credit card accounts (noting the loan amount and a detailed, month-by-month history of the timeliness of your payments), any financial public records or collections placed on you by lending agencies, and tracking each inquiry into your credit report by interested lenders.

Your credit report is tied to your social security number, which is why it is so important to keep that number secret. While you can pay each credit tracking agency at any time for a copy of their report on you, you are entitled to one free credit report from each company every year.

Almost as good is Credit Karma, which will give you a detailed credit report and estimated credit score… for free! Credit Karma is an essential tool that I use weekly in my points collection.

Based on the information in your credit report, each reporting agency compiles your credit score, a number between 300 and 850 that communicates to potential lenders your credit-worthiness, essentially, how likely you are to repay a loan on time. A score above 750 is considered “Excellent”. When you apply for a car loan or look to open a credit card, lenders are laser-focussed on your credit score; if it’s high enough, you’re generally good to go with the best rates, too low and you’ll be denied or the interest rate will go sky-high.

A good credit score is your ticket to easy lending at low rates. That’s why it’s so important.

Different factors impact your cumulative score:

  • Payment History (35%)
  • Credit Utilization (30%)
  • Age of Credit Accounts (15%)
  • New Inquiries (10%)
  • Mix of Accounts (10%)
Factors that make up your credit score.

As you can see, there are many factors that lead to a healthy credit score. The general rule is to always make on-time payments, maximize the amount of credit you have while lowering how much you are using at a given time, keep accounts open for a long time to establish the age of your accounts, have different types of credit (car loan, mortgage, credit cards, etc.) and minimize the amount of inquiries on your credit report.

How New Credit Cards Affect Your Score

When you apply for a new credit card, a few things happen.

First, every time you open a credit card, be it the Chase Freedom (0% APR with up to 5X points) or from a department store, as the potential lender learns your credit score a new line is listed on your credit report noting the credit inquiry. The more inquiries you have on your report, the lower that portion of your score will be. Lenders get nervous when it looks like you are opening up too many lines of credit, as it could reveal a cash flow problem.

As new inquiries represent about 10% of your score, I find that my credit score drops 3-5 points every time I apply for a new card. This number is the quickest “hit” on your credit report to rebound. Within six months of the inquiry, I find that it’s no longer impacting my credit score. New credit inquiries stay on your full report for two years.

But that’s not the whole story.

Assuming you are approved for the card, a few more numbers will change. First, because your new credit card will come with new credit that you haven’t used yet, your credit utilization ratio will drop. That’s good.

On the other hand, because you are opening a new credit card, your average account age will also drop. That’s not good. (The exception here is for American Express cards, which all report the first year your first American Express card was opened).

How much these two factors will impact your score depends on your current credit utilization as well as the total number of accounts leading to your average account age (the more accounts you’ve ever had, the less any single one will impact the average account age).

Earlier in my points collection gaming, each inquiry impacted my score more, for longer. These days, the impact is almost negligible.

Key Learnings

So how do I have a credit score that hovers around 800, despite applying for as many as ten or more credit cards a year? I follow a few key rules:

Keep Accounts Open

Whenever possible, I keep accounts open, even if I no longer use them. So long as it has no annual fee, I will never close a credit card. If it does have an annual fee, I will try to “downgrade” it to a no annual fee version before the anniversary date, rather than closing it.

For example, part of the strategy to gathering enough Alaska Airlines miles for our Emirates ticket last month involved “churning” the Bank of America Alaska Airlines Credit Card. I had no use for this card besides the sign-up bonus, however, when the anniversary date neared, I spoke with Bank of America and was able to convert the card to the no-annual fee Cash Rewards card, thereby keeping the credit (to lower my utilization ration) and lengthening my average account age. Score!

I currently have more than twenty open credit cards (another frequent question), though I’m only regularly using or paying an annual fee on two of them.

Spread Applications Across Multiple Banks

Not all banks report all credit inquiries to all three reporting agencies, so you can protect your score by ensuring that you spread your credit card applications across multiple banks.

For example, American Express won’t be too happy about opening three cards for me in one month’s time, and the impact on my credit score would be great, but if I apply for one American Express card, one Barclay card, and one Bank of America card, it’s possible that each will report the inquiries to different reporting agencies, and my credit score will only reflect one inquiry, even though I’ll get three new cards.

Winning!

Apply for Multiple Cards in One Day

The evidence on this piece is anecdotal, but it is generally believed in the points community that inquiries take 24 hours to show up on your credit report, so I encourage you to apply for multiple cards in one day. That way, each bank will not know that you are getting three to four cards at once. After this, wait three to four months for your credit score to rebound before considering a new app-o-rama.

Take-Away

It really is possible to have a pristine credit score and game the points and miles system to maximize credit card sign-up bonuses. There was a time when the easiest way to earn miles was by sitting on an airplane, but that day is long gone. The best and quickest way to achieve aspirational awards is without question through credit card sign-up bonuses (the second best is through credit card spending!).

One important caveat: if you are considering applying for a mortgage in the near future you should severely limit (or altogether abstain from) opening new credit cards. Even if your credit score is top notch, new inquiries will not look good to your potential lender – given the amount of money involved, it’s just not worth it.

So go for it – if you’re ready to do it, check out the “My Wallet” section of the right sidebar and apply for the Sapphire Preferred or the Freedom Card. It is possible to reap the benefits of credit card sign-up bonuses while still maintaining a good credit score.

And just to prove it, here’s mine:

Courtesy of Credit Karma.