Your credit score and credit card rewards: 10 tips

This is the second post from Hilary Stockton, who is the founder of TravelSort, which helps savvy travelers earn millions of miles without flying, redeem them for first-class flights, and stay in luxury hotels at wholesale prices. Follow her on Twitter @TravelSort.

I often get asked about the impact on one's credit score of churning or signing up for multiple rewards credit cards, especially by those new to earning a million or more frequent flyer miles and points via credit cards. It's definitely important to protect your credit score, and no one should sign up for a slew of new credit cards without taking the time to understand how your credit score works and whether you should be applying for new credit cards at all.

1. Only sign up for new credit cards if:

  • You don't have any credit card or other high-interest debt
  • You always pay your credit card bill off in full every statement
  • You have a steady income
  • You don't plan to apply for a mortgage, refinancing, student loan or other major loan within the next year or so
  • You aren't tempted to spend more by having more credit cards

If you do have any credit card or other high-interest debt, paying that off is far more important than earning miles, points, or any other kind of credit card reward. You also shouldn't apply for a number of new credit cards if you plan to get a mortgage, refinancing or other major loan in the next year or so, because you want to ensure you're offered the best possible interest rate.

2. Have a FICO credit score range 720 or above

FICO scores from the three credit bureaus (Equifax, Experian and Transunion) range from 300 to 850. You'll need a credit score of at least 710 to apply for rewards credit cards, and preferably 720 or higher.

3. Get a free copy of your credit report

You're entitled to a free copy of your credit report every year, which you should check to ensure there are no inaccuracies. If there are, you should dispute them, since they're likely negatively impacting your score and your ability to not only be approved for the best travel rewards credit cards but also being able to secure the best possible interest rate for loans.

4. Know the difference between FAKO and FICO

Unfortunately, there are a lot of places offering to sell you your credit score that are completely worthless, because the score they're providing isn't the one that's actually being used when determining whether to approve you for a new credit card or loan. These fake credit scores have been nicknamed “FAKO.” Even the credit bureaus themselves sell FAKO, so as not to have to pay to FICO to provide your actual FICO score. See more about this at Credit Score: FICO or FAKO?

5. Understand the factors influencing your credit score

Your FICO credit score is determined by these factors:

  • 35 percent is payment history: If you always pay on time, don't carry any credit card balances and have no delinquent accounts, bankruptcies or similar against you, you're fine. But make sure you continue to monitor your credit report to guard against inaccuracies.
  • 30 percent is credit utilization: This factor looks at the percentage of your credit line that you're using. So, for example, if you have a $10,000 credit line on a card, you don't want to maxing it out every month; in fact, you should ideally only be using a small percentage (under 10 percent) of your credit line. If you have a major purchase, pay it off immediately rather than waiting until the payment due date.
  • 15 percent is length of credit history: Just as the description implies, this factor measures your average age of accounts.
  • 10 percent is types of credit used: This factor looks at the various types of credit you use, such as home mortgage payments, car payments and credit card payments. It also helps explain why, frustratingly, some folks who rent yet own their own car and have never missed a credit card payment can have a lower credit score than a much more indebted homeowner with a leased car who is nevertheless making payments in full and on time.
  • 10 percent is new credit: This factor accounts for the hard pulls or inquiries that result from applying for new credit, such as a mortgage, car loan, student loan, and new credit cards. Each new hard pull does knock a few points off your score, although in most cases your score recovers within 90 days to six months.

6. Keep utilization low on personal credit cards

Due to how important credit utilization is in calculating your credit score, I always recommend you keep your credit utilization as low as possible on your personal cards:

  • Pay off major purchases right after they're incurred, even before your statement close.
  • If you incur business expenses, ensure they go on a business credit card or charge card. Business credit card utilization is NOT reported to the credit bureaus.

7. Apply for new credit cards on the same day, as close in time as possible

The reason most serious credit card churners apply for multiple credit cards simultaneously, or as close in time as possible on the same day, is two-fold:

  • By not applying for any credit cards for a few months you can avoid being rejected for “too many recent credit inquiries.”
  • If you're applying for two or three personal cards from the same bank, your hard pulls may be merged into one, reducing the impact on your credit score.

8. Don't close your oldest credit cards

As mentioned above, credit history accounts for about 10 percent of your FICO score calculation. That's why you want to always keep at least one or two credit cards that you never close. Make sure they're no annual fee cards, and preferably a no annual fee card that still earns rewards.

9. Avoid closing a credit card without first transferring the credit line to another open card

Be careful when closing credit cards that you don't lose the credit line. Opening new credit cards can actually help your credit score over the long term if it increases your total amount of credit relative to your utilization. So, when you do decide to close a credit card, ask the representative to transfer the credit line to one of your other credit cards from the same bank.

10. Stop applying for new credit cards about one year before applying for a mortgage or major loan

As I mentioned in the first tip, it's key to not let lucrative credit card rewards blind you to the importance of securing the lowest possible interest rate for a mortgage or other major loan. Stop applying for new credit cards about one year before you apply for a major loan, continue to always pay your balance off in full every statement, and aim to keep your credit utilization at 10 percent or lower for all your personal credit cards.

More about...Credit

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Jacob@CashCowCouple
7 years ago

Thanks for the tips. Happy Sunday!

Lance @ Money Life and More
Lance @ Money Life and More
7 years ago

This article is exactly how I feel about people applying for credit cards. If you can follow all of these rules there is no reason you shouldn’t take advantage of the crazy money credit card companies will throw at you.

D. Cluff
D. Cluff
7 years ago

Agreed!!! Last year I made over $2000 from opening personal and business credit cards, using once to get the reward, then paying the balance and cancelling. All legit. No tax ramifications and my credit score is 814, husband’s 783. Didn’t seem to effect anything badly. Both in our fifties and keep our oldest 2 credit cards from the 1970’s. Usually pay in full every month, but let the new 0% cards ride once in a while to establish better “credit”. We are also debt free, no mortgage, etc., if that matters. You really have to be organized & disciplined to… Read more »

Matt Becker
Matt Becker
7 years ago
Reply to  D. Cluff

I could be wrong, but I don’t think there’s any benefit to keeping a balance on a card, as you’ve suggested Cluff. I’ve actually seen people get in trouble trying to utilize that exact strategy because they’ve been charged interest on that balance. As far as I know, your credit score benefits from using the card and paying it on time. There’s no additional impact from keeping a balance, and in fact it could serve to hurt you as your utilization rate would increase. Paying off your balance in full every month is the best way to go.

lmoot
lmoot
7 years ago
Reply to  Matt Becker

Yeah, I don’t see how letting the balance pile up on a 0% interest would help your credit score more than paying it off monthly. However, I take advantage of 0% interest by maxing the card out (purchasing as I normally do, not going on a spree or anything like that!), and saving the cash in a high-yield saving account. Not only do I get the reward points on the card, but I’m earning interest on that as well, so often it comes out to 2.5% cash back on all purchases. Letting it ride can actually hurt your score if… Read more »

D. Cluff
D. Cluff
7 years ago
Reply to  Matt Becker

Cluff here again. I don’t “pile up” debt on the 0% card. I charge maybe $40, pay the minimum ($10) the first month, pay off the rest the 2nd month, then cancel the card after rewards are given. I was under the impression that you are supposed to carry over to another month once or twice a year just to show you can pay responsibly, but you posters say it’s not necessary. Again, with a credit score of 814, debt free and no mortgage, I’m not to worried.

Mrs PoP @ Planting Our Pennies
Mrs PoP @ Planting Our Pennies
7 years ago

Re “3. Get a free copy of your credit report”

Just a PSA for people that haven’t heard. If you’re a Wells Fargo customer, you can get a free copy of your credit report through April 15th by stopping in at a branch asking for a “Free credit report brochure”. It won’t count against the 3 you already get for free each year from annualcreditreport.com, nor will it count as a hard hit against your report.

Jacob
Jacob
7 years ago

Question is the credit history/ length of time a account is opened measured off active accounts only? Or if I had opened a bunch of credit cards over the years and canceled 3 months later going to hurt my length of credit history?

Hilary @ TravelSort
Hilary @ TravelSort
7 years ago
Reply to  Jacob

Jacob, as I mentioned in my response to Paul below (comment 13) closed accounts can remain on your credit report up to 10 years, but they can fall off sooner than that. I never recommend canceling a card after only 3 months, particularly rewards cards that have a “claw back” provision as these often allow the issuer to take back the bonus miles or points if you cancel within 6 months. Instead, I would aim to always keep a couple of no annual fee accounts that you never close to help your length of credit history, and explore retention offers… Read more »

Andrew
Andrew
7 years ago

Question about the credit utilization. If you have multiple cards, each with individual credit limits, does the credit utilization part of the score consider how much you credit you use for one card or across all cards? For example if I had one particular card with $2,500 credit line but my total credit line across all my cards is $20,000. If I spend $2,000 on the credit card, my utilization would be 80% for that card but only 10% overall. Would I get dinged for that 80% utilization on that one card?

Matt Becker
Matt Becker
7 years ago
Reply to  Andrew

The credit utilization is measured as your total outstanding balance across all cards divided by the total credit limit across all cards. So in your example, the credit utilization would be 10%.

Alison @ Diamond-Cut Life
Alison @ Diamond-Cut Life
7 years ago

Savvy post, full of helpful info. Thank you, Hilary! Seems to me that the only way most of us can meet all the recommended requirements for using credit cards is by learning to be be happy without buying lots of stuff. Which is what I write about. Good to find kindred spirits, like I often find at GRS.

@pfinMario
@pfinMario
7 years ago

You said: “Only sign up for new credit cards if: You don’t have any credit card or other high-interest debt; You always pay your credit card bill off in full every statement” I wonder if you’d think this a sensible exception to your rule: One of the key steps in my paying off credit card debt was getting a $14,500 balance transfer at 0% with a 0% fee, good for a year. Since the debt I was paying off was at 22% and 20% (eek) I probably saved at least $2000 by transferring those balances while paying down debt. I’ve… Read more »

Hilary @ TravelSort
Hilary @ TravelSort
7 years ago
Reply to  @pfinMario

Mario, agree that finding a way to lower your interest payments by taking advantage of intro 0% APR balance transfers can be great when paying down credit card debt. I always recommend getting completely out of debt before applying for rewards credit cards. If one doesn’t have any debt but do have a large purchase, it’s also possible to put this on a rewards card then transfer the balance to a card that offers a 0% intro APR for balance transfers–just be sure there’s no percentage fee charged for the actual balance transfer, as I mention in this post: http://travelsort.com/blog/best-0-apr-and-balance-transfer-rewards-credit-cards

Carla
Carla
7 years ago

I wish there was a way to earn miles without the use of credit cards.

Hilary @ TravelSort
Hilary @ TravelSort
7 years ago
Reply to  Carla

Carla, thanks for your comment. While credit cards are far and away the best way to build enormous miles and points balances for those of us lucky enough to live in the U.S., where all the best credit card offers are, here are some other ways:
-Bank Direct, for AAdvantage miles (see my post http://travelsort.com/blog/bankdirect-best-way-to-earn-aadvantage-miles-for-half-a-cent-per-mile)
-Opening Fidelity brokerage accounts, which come with certain mileage incentives
-Shopping, especially via online mile and point malls such as the Chase Ultimate Rewards Mall
-Flying, of course

Carla
Carla
7 years ago

Thank you so much, Hilary! I am in no position to apply for a credit card nor do any traveling for that matter, but I have to start somewhere. I will check out the links you listed.

Mark
Mark
7 years ago

I always remember some advice Warren Buffett once gave…

Avoid debt! Forget the credit cards. If you need to use them (as opposed to using them for points or to buy online) then you shouldn’t be buying whatever you’re buying.

Here’s some more advice on ‘getting rich’ from Warren Buffett’s long-time partner, Charlie Munger: http://www.planbeconomics.com/2013/04/charlie-munger-reveals-secrets-to.html

Paul
Paul
7 years ago

I believe it is no longer true that you should leave old account open. They’re corrected that with the most recent version of FICO. From bankrate.com “Closure doesn’t automatically wipe out the payment history for that account. As long as the account remains on your credit report, it will still count toward your payment history, your types of credit used and the length of your credit history. Closed credit card accounts with no delinquencies or balances will come off your credit report within 10 years from the date they were reported closed. Long story short: While you may not hurt… Read more »

Hilary @ TravelSort
Hilary @ TravelSort
7 years ago
Reply to  Paul

Paul, thanks for the comment. It’s true that even closed accounts can count towards your credit history *while* they remain on your credit report, and they can stay on the report up to 10 years. But they can also fall off your report sooner, which is why those of us who do open a significant number of credit cards for miles and points always aim to keep a few (preferably no annual fee) credit cards that we’ve had for many years, to mitigate against the cards we end up closing. What we don’t want is a few years hence have… Read more »

Shawn
Shawn
7 years ago

Well I wish I would have read this a long time ago! This is all great information that makes a lot of sense. I have gotten myself into a lot of debt and not managed my money wisely when I was younger. I am in the process of simplifying my lifestyle to manage the debt that I have and I will be monitoring my credit score from now on. This stuff will come back and bite you in the ass if you are not careful. I will be coming back here often for financial advice. Thanks for this post!

John Parker
John Parker
7 years ago

Hilary is a very smart lady. I just checked her website out and confirms her authority in the field.

You offer great tips and like this post very much. Would like to see more.

I would like to mention that even if your have a zero credit card balance the creditor will take your credit limit on this card in consideration.

So don’t have to many card even if you have no debt on them. It will hurt your credit score.

Regards.

lmoot
lmoot
7 years ago

Opening up lines of credit don’t always make your score go down. In my case I strategically opened up 2 new accounts before refinancing this coming December, and it caused my score to go up. Bascically the reason why opening new cards can hurt your score is because of the hard inquiry, and it causes your average credit age to go down. I opened two accounts within a week (which only dings you once since it’s within a short period of time) and requested and got an increase on an existing card. In 72 hours I caused my utilization to… Read more »

Tara Lynn
Tara Lynn
7 years ago

My Citi and Venture One credit card have always treated me well however, I am not sure if that would be the case if I left a balance on it at the end of each month or if I had bad credit to begin with. I really liked the break-down for which card to recommend depending on what your credit report is like. I still am not a big fan of Chase. I had bad luck with them.

Hilary @ TravelSort
Hilary @ TravelSort
7 years ago
Reply to  Tara Lynn

Tara, thanks for your comment. Everyone has different goals, so credit cards are definitely not a “one size fits all” situation. In fact, for those who only travel domestically and never want or plan to fly first class or business class internationally on an award ticket, cash back cards can be the best bet. The travel rewards cards I recommend are most valuable for earning the miles and points to fly international on airline tickets that would retail for $5000-$25,000 or more for the cost of taxes. While I never recommend Capital One cards because it’s a fixed value program… Read more »

Mark_Walburg
Mark_Walburg
6 years ago

I am sad that I am late reader! There is such a great lesson learned after reading this fantastic post ( may be because I have already indebted myself and made mistakes). Anyhow, Thanks for sharing!

Hilary @ TravelSort
Hilary @ TravelSort
6 years ago
Reply to  Mark_Walburg

Thanks Mark! Glad that you found the post helpful.

Mark_Walburg
Mark_Walburg
6 years ago

Hi Hilary!
I found it really helpful and would love to read more 🙂
Keep inspiring!

amanda montano
amanda montano
6 years ago

Hello! I want to improve my credit score, but can’t seem to figure out how to do so. I am not working and am a full time nursing student. I feel stuck, please help. Amanda

Alex @ CreditCardXpo
Alex @ CreditCardXpo
6 years ago

Having a good credit score is very important and it allows us to make money (from credit card rewards/cash back) and save money (from getting the lowest interest rates on a car loan or mortgage)!

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