Family Travel Hacking Guide

Family Travel Hacking Guide 12: How applying for credit cards affects your credit score

To do: Check your credit score on Credit Karma or Annual Credit Report, then take a look in the mirror and honestly assess whether you have the fiscal discipline to play this game. In general a score of 700 or better should do you fine.

Miles and points earned from credit cards form the backbone of almost every solid travel hacking strategy. For the majority of people, the sign up bonuses earned from meeting minimum spending requirements on new credit cards provides the bulk of the earning. Sign up bonuses are usually the quickest way to earn miles and points.

That of course begs the question: how will signing up for a bunch of credit cards hurt your credit score? To understand this, it’s important to understand how credit scores are calculated.

Before I continue, a reminder: if you are carrying debt with interest on your credit cards, these strategies are not for you. Even a 5% interest rate is going to severely eat into your travel savings (if not obliterate them completely).

How to check your credit score

If we’re going to talk about credit scores, it’s important to discuss how to do so. One site I recommend, even despite their relentless ads on television, is Credit Karma. Credit Karma will give you approximate scores from Transunion and Equifax, two of the three major credit reporting bureaus (the third is called Experian). You can also get a free credit report from each of the three major bureaus once every 365 days at annualcreditreport.com (don’t confuse that with freecreditreport.com). Those credit reports won’t give you a credit score but can give you a good sense of where you stand.

There are also many sites that will give you your credit score for a price. I recently wanted to check my Experian score so I signed up for a $1 trial at experian.com and canceled within seven days.

Four years ago, when I first wrote the bulk of the information in this post, I was really concerned about my credit score. Four years and almost fifty credit cards later, I’ve stopped worrying about that. If you do it right, your score won’t suffer. In fact, I went from a 750 or so back then to…

If you play the game right your credit score will be just fine
If you play the game right your credit score will be just fine

There are six main factors that affect your credit score, but only three that have a major effect when applying for new credit cards. Under each factor, I’ve noted positive and negative benefits of applying for a bunch of credit cards, but note: this is all assuming you pay your bill off every month (or make the minimum payment on a 0% interest card that you will pay off in full when it is time).

Again, if you don’t have the means to do that, you should seriously consider not getting involved in the points game.

1. Number of Credit Inquiries

The number of credit inquiries (or checks) on your report definitely affects your credit report and score. Most people know this. In fact, this leads to the oft asked question “Won’t applying for all these credit cards hurt my credit score?

What you might not know is inquiries only stay on your report for two years. After that, it’s like they never happened. Another thing to note is not all banks check credit from the same credit bureaus. Say I apply for a Chase credit card and Chase checks my Experian score. The next day, I go to Barclays and apply for a different credit card.

If Barclays uses Transunion to check my credit, they will have no idea that I have a credit check on my Experian report (thus my Transunion score will be a little higher). This is something that can alleviate the dings on your credit score when applying for new cards.

Another nice tidbit is, if the same bank pulls your credit from the same credit bureau on the same day, sometimes it only registers as one credit check. For example, back in the day I applied for two Citi credit cards, but when I checked my credit report there was only one credit “pull” from Citi on it. This should give you some ideas of how one can ameliorate the negative effect of credit pulls. Still, the number of credit inquiries generally only leads to a negative impact on your credit score.

Negative impacts: Every credit inquiry in the last two years brings your score down, generally proportionally to how recent they are (the more recent, the more they bring it down)

Positive impacts: None, though there are some tricks you can use to your advantage to minimize the negative impacts

Discover offers free credit checks as well
Discover offers free credit checks as well

2. Average Age of Accounts

The second thing to consider when applying for new credit cards is your average age of accounts, which is literally an average of the length of time you’ve had your credit card accounts. Closed accounts count towards this as well for 7-10 years until they final drop off your credit report.

When you open new credit cards, obviously your average age of accounts (AAoA) will decrease, hurting your credit. However, if you keep them open, then your AAoA will gradually increase, improving your credit score. In general, I’d recommend keeping ALL cards that have no annual fee open in perpetuity, because they only will help your credit score.

Cards with fees should be closed if you don’t think the fees are worth it (more often than not). If you are opening credit cards, getting the bonus, and then closing most of them within a year, in general, your AAoA should stay pretty constant. This is because its the cards you are keeping (in my case, the non fee cards I had before I started this points madness) that are pulling up your AAoA. Fuzzy math!

Negative impacts: Opening new cards will decrease your average age of accounts and pull down your credit score

Positive impacts: Eventually your average age of accounts will increase and improve your credit score over time

3. Credit Utilization – ratio of debt to credit limits

Your credit utilization ratio equals the ratio of the amount of money you put on your credit cards to your total credit card limits. Simply put, banks want to know you’re not borrowing all the money available to you, because if you are, that’s a major red flag.

Whenever you are approved for a new credit card, a bank is agreeing to lend more money to you, thus the total amount of money available for you to borrow increases. If you continue to spend the same amount of money on your bank of credit cards, your credit utilization ratio decreases, and this increases your credit score.

Keeping your credit utilization low will keep your credit score high
Keeping your credit utilization low will keep your credit score high

Quick example: I have two credit cards with a credit line of $5000 each and put about $1000/month on them. I calculate the total credit available to me by taking the sum of these two credit lines ($10,000), and my credit utilization ratio is $1000 / $10,000, or 10%. If I apply for a third credit card and get approved for a credit line of $10,000, the total credit available to me increases to $20,000. But if I still only spend $1000 a month, then my new credit utilization ratio is $1000 / $20,000 or 5%. Since it’s gone down, my credit score increases. Clean math.

Negative impacts: None, as long as you don’t start spending way more money since you have shiny new plastic 

Positive impacts: As long as you keep your spending about the same, your credit utilization ratio will decrease and your credit score will increase!

Final Thoughts

In general, if you are starting with good credit, applying for new credit cards will probably follow this pattern: small drop when applying, followed by a gradual increase in credit score over time if you continue to spend the same amount of money and pay off your bills.

Note the other factors that affect your score: negative marks (late or missed payments, bankruptcy), total number of accounts, and on time payments aren’t affected much by applying for new cards.

Also, even if you don’t have a long credit history, you can slowly build history by applying for two or three cards a year and keeping some of them open. You probably want to be wary of applying for too much credit if you have a SERIOUS credit need in the near future like a mortgage, although if your score is solid you probably won’t have many problems.

If you are getting into the points game, it’s important to keep tabs on your credit using websites like Credit Karma (free!). Note that neither of those gives you your actual credit score, but they are good estimates (I just look for trends – up or down). You should also be checking your actual credit reports once a year using annualcreditreport.com. Also, if you’d like to learn more about how your score is calculated, I’ve found this page very helpful.

My major takeaway from this entire post? Applying for new credit cards regularly does not hurt your credit score as much as you might think – and might even help it.

To do: Check your credit score on Credit Karma or Annual Credit Report, then take a look in the mirror and honestly assess whether you have the fiscal discipline to play this game. In general a score of 700 or better should do you fine.

Family Travel Hacking Guide Index

Introduction

Set a Travel Goal

Using and Tracking Frequent Flyer Programs

Who to Follow on Social Media

Part 1: Saving Money on Cash Flights

Saving Money on Cash Flights

How to find cheap airfare with airfarewatchdog

Finding cheap airfare with The Flight Deal

Finding the cheapest airfare using Kayak alerts

Using Hopper to monitor flight prices

Using Google Flights to search airfare

Part 2: Earning miles and points efficiently and cheaply

The power of miles and points

Family Travel Hacking Guide 12

Joe
Just an average joe trying to fly his family for less
http://www.asthejoeflies@gmail.com

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