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.