Step 5: Credit Score
Credit card sign-up bonuses is my favorite and easiest way to boost my miles and points accounts. However, when I first started getting into this hobby, my wife was concerned with how this will affect my credit score and potentially affecting us getting approved for mortgage in the near future (we are currently renting). While there’s always been a connotation of negative effect when apply for multiple credit cards, this is not necessarily true in all cases. Applying for new credit cards might actually help in building up your credit score.
As you can see in this chart from myfico, there are 5 factors that affect your credit score:
1-Payment History (35%):
This is the single largest factor in your credit score, and it simply means the act of paying all your bills in time. This takes into consideration you mortgage, credit cards, retail credit cards, car loans and any other payments against a credit line extended from a financial institution. It also factors in how large the amount of the late payments and how often you make a late payment. This is a crucial factor you would want to maintain in good condition in order to build up your credit score.
2-Amounts Owed (30%):
Almost as important as you payment history, the balance you carry on your credit lines counts almost as high as your payment history. The higher your amounts owed compared to your total line of credit, the lower your credit score.
3-Length of Credit History (15%):
Not as high as the previous two factors, but an essential one as well. The longer you’ve had credit, the higher your credit score. This is why it is important to start building up your credit as early as possible in life. However, even people who are fairly new to building credit might have high credit score depending on how well the other factors are.
4-New Credit (10%):
Opening several credit cards in a short period of time might lower your credit score – especially for people who have a short credit history.
5-Types of Credit in Use (10%):
FICO Scores will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans.
From my personal experience every credit inquiry due to a new credit card application puts a small ding in my credit score of about 2-5 points (out of a total of up to 850). So it’s not that big of a hit and I’ve noticed that as long as I’m maintaining the other factors (paying on time, not carrying huge balances), my score goes back up again in about a month. This might not hold true when applying for several credit cards in a short period of time, which I have yet to try.
However, the major factor that affected me positively the most is Amounts Owed. I opened 7 new credit cards in less than a year and as I noticed that my credit score gets hit with 2-4 points for every application. I also noticed that my overall credit score went up by about 35 points from the day I submitted my first of those 7 credit card applications.
Since I’ve been maintaining payment history (paying my balances in full each month), length of credit history (by not canceling old credit cards), My credit score went up because I’m using a smaller percentage of my total credit allowed since every time I apply for a new card, my total credit line increases but my spending habits are the same.
For example, if each credit card I open gives me $10,000 of credit line and my monthly expenses are $5000. Having 2 credit cards means I’m using 5000 out of 20,000, having 5 credit cards means I’m using 5000 out of 50,000. The lower your utilization percentage, the higher your score.
Your credit score is a very important tool and you should always be mindful of it and how you use it. Credit card applications spread carefully over time shouldn’t hurt your credit score on the long run. But always make sure that your applications and expenses are reasonable and within your means. Don’t overspend and always pay you balances in full and on time and this will result in your credit score and your points and miles balances to flourish and prosper.