There’s a lot of misinformation on the internet right now regarding how your credit score works and how applying for credit cards will affect your credit score. I took it upon myself to research and get to the facts about how your credit score works.
So first off, what is a credit score?
A credit score is a score from 400 to 850 given to a person that reflects his entire credit life. It essentially tells people or companies how trustworthy you are to lend to. The higher the better.
What is a credit score based on?
The credit score used as an industry standard is compiled by FICO. This score is made up of the following parts:
Payment History (35%)
The biggest part of your credit score is affected on how often you pay your credit bills on time. One missed payment can devastate your credit score, so always make sure to set a reminder to pay your bills on time.
Amount Owed (30%)
The second part of your credit score is how much debt you currently owe versus how much you can take out. This is known as a credit utilization ratio. The more credit cards you own, the higher credit limit you have. As a result your credit utilization actually goes down, which results in a higher credit score.
For example: You receive a $5000 credit limit on your newest credit card. If you’ve spent $2000, but still haven’t paid it off, your credit utilization is now 40%. This is a very poor credit utilization ratio and can lower your score. Now, let’s say you applied for another credit card with a $5000 limit. Assuming you haven’t spent any money on the second card, your credit utilization is now 20%.
Length of Credit History (15%)
This compares the average age of your current credit cards. You may have heard “average age of account” being thrown around and how applying for multiple cards will negatively affect your credit score.
However, credit cards don’t fall out of your credit report until 10 years down the road, even if you close them, so impact should be minimal. Regardless, you should also open a couple credits cards that have a $0 annual fee that you can leave open in perpetuity, which will help you increase your Average age of credit.
Credit card Inquiries (10%)
Your credit score will slightly dip after applying for a credit card, but this should rebound after a year. Credit score agencies typically look at the last 6 months for any credit card application.
Types of Credit Used (10%)
This part factors in whether you have other types of loans besides credit cards, such as auto loans or mortgage. Applying for multiple new credit cards will not affect this score. However, having a credit card while at the same time having a mortgage will increase your credit score.
Now that we’ve covered the factors that make your credit score, you probably have some questions about credit cards and credit score. Here are some of the most commonly asked question I’ve frequently been asked.
Would applying for many credit cards significantly affect my credit score?
No. As long as you pay your bills on time the impact to your credit score should be minimal. Your score will go down 2-4 points temporarily after each application, but should rebound within a couple of months. With more additional lines of credit, you are proving to credit lenders that you are more credit worthy. This could actually increase your credit score long term. The key is to make sure you always pay your bills on time.
When shouldn’t you apply for a credit card?
If you cannot pay off your credit card bills on time, do not apply for any credit card. Not only will additional cards cause you to accumulate debt, but you will also have to pay high interest rates.
People who cannot pay off their credit card bills ON TIME. Do not apply for a credit card if you think you will spend more or beyond your means because of them. Not only will this cause you to accumulate debt, but you will also have to pay high interest rates.
Getting a credit card is highly beneficial, but only for people who can manage it well. If you have a tendency to max out your credit cards, then it is probably not wise to apply for a lot of credit cards. Remember, it is good to use your credit card, even to the limit, if and only if you can pay them off on time, every single time. This shows companies that you can borrow and pay debt.
Pay your bills on time.
This is the single best thing to improve your credit score.
Apply for more credit cards.
In order to lend you more credit, Banks need to be comfortable that you can handle additional credit and still pay your bills on time. Thus, applying for more credit cards will actually increase your credit score in the long run.
However, you should limit amount of new cards you apply for so that the bank can trust you with the additional credit. Applying for too many cards with a low credit history is a recipe for disaster
Don’t immediately cancel your credit cards.
Banks enjoy having loyal customers, so keeping a credit card with them shows “good faith” and increases your average age of account, which in turn increases your credit score. Canceling a credit card after just a year might show you were just after the rewards, which might affect future card applications.
How do I check my credit score?
There are three credit bureaus: Equifax, Experian, and TransUnion. Each has their own score which you can check for a fee on their website However, a few banks such as Barclays and AMEX provide the score for free for its card holders.
Now that you learned how your credit score works, let’s go back to the miles maximizer tool.
Introduction to miles
All about loyalty program
Credit cards & Big Signup Bonuses
All about your credit score
How to earn your miles