I totally get it. You’re worried that opening up a bunch of credit card will tank your credit score, damaging your ability to receive a favorable interest rate on your next home or vehicle loan. These were exactly my concerns when reading different points blogs years ago, which is why we were only comfortable applying for maybe one credit card each year and redeeming them for shorter economy-class flights. We are way too risk averse to jeopardize our credit score in any way.
Surprisingly, our credit scores have gone up since starting to play the points game.
I’m not going to pretend like I’m a credit score expert, but I wanted to share our experience.
The most significant factors in calculating an individual’s credit score are payment history and credit utilization (how much you owe relative to the amount of credit extended to you). To a lesser degree, credit scores also factor in the length of credit history (both the total and average account length), the mixture of credit types (student loans, mortgage, auto loan, credit cards, etc.), and any recent credit inquiries.
So yes, applying for a credit card will temporarily lower your score since the application will cause a new credit inquiry (10% of overall score). Depending on your individual situation, it could also impact the composition of your credit types (10% of overall score) as well as being a factor in your average length of credit history (15% of overall score).
However, adding a credit card can also have a positive effect on your credit score. When you receive a new credit card, the card-issuing bank extends you a line of credit. This could be anywhere from $1,000 (my first credit card when I was 19 years old) to $20,000 to $100,000+. This can be dangerous if you aren’t responsible with your finances, but it also can greatly reduce your credit utilization ratio, which is 30% of your overall credit score.
Think about it. If you are religiously paying off your credit card balance each month yet you have thousands of dollars of credit extended to you via credit cards, you are essentially “maxing out” the two most important factors in your credit score. And as Taryn and I have found, the positive effects of those factors outweigh the negative effects of the other factors.
How Cards Impact Our Credit Score
When we started strategically applying for credit cards in September 2015, we had credit scores in the high 700s. Now, each of us have scores in the low 800s.
Above is a screenshot of my FICO score between August 2017 and January 2018. I applied for a few credit cards in the fall, and then a few more in December/January. You can see there’s a slight dip in my credit score after applying for the credit cards, but it bounced back in a few months.
Above are Taryn’s FICO scores between March 2017 and February 2018. One of Taryn’s original credit cards is the Discover card, which provides a 12-month history of the cardmember’s FICO score. Meanwhile, my Citi Premier credit card only gives a six-month FICO score history.
You can clearly see when Taryn applied for credit cards, and you can also see her credit score quickly rebounded the following month. These credit card applications were to earn the Southwest Companion Pass, which I’ll talk about in a future post.
For more background on our personal credit portfolios:
- We purchased a house in May 2013 (and hence have paid mortgage payments since)
- We both opened our first credit cards as freshmen in college (2004/2006)
- We had an auto loan from August 2012-March 2016
- Taryn is still paying off lots of student loans (ugh!); Jameson paid off his student loans from August 2012-November 2017 🎉
- On average, we each have around 4-7 credit cards open at any one time (which includes our very first credit cards opened during our freshman year of college)
I share this information for others to use as a data point when making their own credit card decisions. Like I mentioned, we are naturally risk averse and would have loved for another couple to show specific examples of how credit card applications impacted their own credit scores. Of course, the big caveat is that your situation and experience may differ.
OK…. Ground rules: ☑️
Spiel about credit scores: ☑️
Now we’re finally ready to talk about points.
1. Ground Rules
2. But My Credit Score…