I am fairly new to collecting points and miles. Before I started, I was confident taking out new credit cards would destroy my credit. I am not going the way of 50 Cent. I wouldn’t want my future house with 25 bathrooms to go into foreclosure. Turns out, I was worried for nothing. My credit score actually went up. You can take out credit cards and keep your bling. There are several reasons credit cards do not hurt your credit score.
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1. Payment History is the Single Most Important Factor
Payment history accounts for 35 percent of your credit score, much more than hard credit pulls. If you pay your bills on time, your credit score will improve. If you have more credit cards, and pay them on time, more on time payments are reported to credit bureaus. As long as you pay on time, more credit cards do not hurt your credit score in this portion of the calculation.
Organization is key in not missing payments. All of our credit cards are set to auto pay the statement balance each month, so I never have to worry about a payment slipping through the cracks. I also use Mint to keep track of our transactions and balances across all cards so our identity doesn’t get stolen without us noticing. That $0.69 charge in Brazil isn’t going through on my watch (this actually happened).
2. Credit Utilization is a Large Factor in Determining Your Credit Score
Credit utilization, your debt to credit ratio, accounts for 30 percent of your credit score. This is the single biggest reason my credit score went up when I took out more cards. If you have more credit, but spend the same amount, your credit utilization will improve dramatically. More credit cards do not hurt your credit score, they actually help.
The takeaway here is to not increase your spending because you have more credit. You don’t need three tigers. You aren’t Mike Tyson. Along the same lines, pay your bills in full each month. Any benefit you receive from points and miles will be more than canceled out by interest payments. If you need to carry a balance on your credit cards, hold off on taking out new ones for now.
3. Your Credit Score Improves as Your Cards Age
Once you take out credit cards, hold onto them. If you do not want to pay the annual fee after the first year, ask for a retention offer. Credit card companies will often give you a statement credit or some other incentive to keep the card. At a minimum, most companies let you downgrade to a no annual fee card. Do not attempt to downgrade until after the annual fee hits the second year, as some companies, in particular American Express, have been known to take back your intro bonus if you do a product change within the first year. Most credit card companies will refund the annual fee if you call them within a certain period of time. New credit cards can bring down your credit score a little, but just like the Golden Girls, your credit score will improve with age.
4. Hard Credit Inquiries Don’t Affect Your Score Very Long
Hard pulls on your credit are a small part of your credit score. If they affect your score at all, it will be minor and temporary if you already have good credit.
With that said, don’t waste a hard pull if you don’t have a decent chance of being approved. Before you apply for a card, a quick google search can tell you generally what range of credit scores are typically approved, as well as any limitations the company has in place. The order in which you apply for credit cards can be important. For example, as of the time of this writing. Chase has a 5/24 rule. If you have taken out or been listed as an authorized user on 5 cards from any company in the last 24 months, you will likely be declined. American Express limits the total number of its cards you can hold at once. Most companies will get nervous if you have taken out a lot of cards recently, but some more than others.
The individual requirements of each company are constantly changing. The Points Guy has a lot of great content regarding the odds of getting approved for specific credit cards. You should research the cards for which you want to apply in the next year or two. Space out applications and apply in a strategic order.
Credit cards get a bad rap. True, the interest rates and fees are ridiculous, but if you can manage them, they are incredibly beneficial.
If you do not have good credit, work to improve it. Pay your bills on time and try to reduce your debt to credit ratio by paying down your balances. You are missing out on great opportunities, not to mention better interest rates when you take out a car loan or a mortgage, by having bad credit.
Check your credit report. You can obtain free reports through the three credit bureaus annually. Better yet, use NerdWallet. This free app was life changing for me. It breaks down your credit score, accounts and balances. It also projects what will happen to your credit score if you take certain actions like applying for a new card or making late payments.
Is there something on your credit report that shouldn’t be there? Appeal it. My husband recently had a doctor’s office accidentally send him to collections. We only found out because NerdWallet (the best app ever), notified us his credit score dropped 47 points overnight. After going all Alec Baldwin on the doctor’s office, I filed an appeal with the two credit bureaus to which it was reported. Both deleted the entry within four hours. The entry was an error as the bill was already paid in full, but I doubt the credit bureaus did any real research before modifying the report. If something looks off, file an appeal and see what happens.
Points and miles have allowed us to travel without an opportunity cost. Do not let fear of any potential impact to your credit score prevent you from going for it. Set up auto pay on your credit cards, pay your bills in full each month, get organized and space out your applications. You will be fine. Whatever your chosen mode of transportation, use your points and miles to get out there and make memories.