Signing Up for Travel and Reward Credit Cards Won't Kill Your Credit Rating

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  Credit Card ReferenceCredit Cards 101

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Many people are concerned about getting “too many” credit cards because they believe that it can’t be good for their credit rating.

  • The truth is surprising—applying for a handful of new credit cards can often significantly IMPROVE your credit rating. Several of us have had our credit ratings improve significantly from the time when we only had a card or two to the time that we had signed up for a bunch of useful cards.
  • In addition, you can monitor your credit score throughout the process and make sure that you aren't experiencing any significant negative impacts.
  • Thousands of people make it their “hobby” to collect (and use!) millions of points through the relatively easy process of signing up for credit card bonuses—it hasn’t killed their credit and it hasn’t stopped them from getting approved for new cards.
  • However, it is CRITICAL that you can use these cards responsibly. If you get new cards and start missing payments, you will indeed damage your credit rating. If you get new cards and start using your newly available credit to buy stuff you wouldn’t have otherwise, you’ll damage your financial life.

How your credit score is calculated

To understand why getting more credit cards may improve your credit score, you need to understand the basics of how your credit score is calculated. The exact formula is a “secret”, but the credit rating companies provide the basic outlines.  For your FICO score (which is used about 90% of the time):

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35% of your score is based on your payment history—how often you were late with a payment, and whether you have been in default for a loan.

30% of your score is based on your credit utilization—how much of your available credit you are using.

15% of your score is based on your length of credit history.  The most important factor is the age of your oldest account; another important factor is the average age of your accounts.

10% of your score is based on your recent credit inquiries.

10% of your score is based on how many types of credit you have—personal, home, auto, etc.

You can easily get free access to your credit reports to see how you’re doing overall and with each component of your score.

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What happens when you get a new card?

When you apply for a new credit card, it impacts your score in several different ways:

  • The bank will usually make a credit inquiry (Amex often skips a full credit pull for existing cardholders). This will negatively impact the recent credit (10%) part of your score. This effect only lasts one year and is greatly reduced after just 90 days. However, the fact that you applied for a new card (as opposed to any credit score drop) might impact credit decisions for up to two years. Many lenders view larger numbers of credit inquiries as a sign of credit risk, independent of your actual credit score.
  • Your overall amount of credit will go up. Since your spending will (hopefully) remain the same, your credit utilization (30%) will drop.
  • The average age of your accounts will slightly decrease, which will negatively impact the part of your length of credit history (15%) that is determined by your average age-of-account. However, even if you cancel the card later, they will continue to count the card for 10 years, adding to your average age of credit. So over time, your average age will wind up going back up.
  • As you pay off the card over time, you’ll get a small boost to your payment history (35%), as paying a larger number of accounts on time will help your score.

For many people, the improvement in their credit utilization rate will outweigh the other factors and make their scores go up

For example, if you have a single credit card and are charging and paying off 40-50% of your credit limit each month, you probably think you are demonstrating that you a good credit risk—after all, you haven’t extended yourself with too many credit cards and you are paying off your card each month. However, to the bank, it looks like you are using up half of your available credit and their risk tables say that you are somewhat likely to run into credit problems.

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If you get another card with the same size limit, suddenly you are only using 20-25% of your available credit, even though you are spending and paying off the same amount of money each month. Get four more cards, and you are only using 8-10% of your available credit. From the bank's perspective, if you are hardly using any of your credit, you are unlikely to run into credit problems and your credit score rises.

Because your credit utilization is such a major part of your score, this change outweighs the smaller negative changes for the credit inquiry and the small decrease in your average age of accounts, and voila!, your credit score increases.

Once you have a bunch of cards, applying for an additional card will drop your score 3-5 points for one year

  • Once your credit utilization score gets below about 10%, getting new cards stops having much of a beneficial effect on your credit score. Each new card just causes the small negative impacts.
  • Expect your score to drop about 3-5 points when you apply for a new card. This is true for all cards you apply for, regardless of whether you get approved or not, and is also true for small business cards that you are guaranteeing with your social security number.
  • However, applying for new cards will only affect the new credit component of your score for one year—cards older than one year are not considered new credit.  Applications will still be listed on your credit report for two years—so banks can see how many cards you’ve applied for, even if your score is unaffected. 



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