Let’s Talk About Credit
Category : Uncategorized
DISCLAIMER: I am not a credit analyst. The information below is based on my experience and the experience of others who earn miles and points.
Yesterday you read about the opening of 20 credit cards in one calendar year. One of the first questions that springs to some minds is: “20 credit cards? Won’t that decimate your credit score?” Let me explain.
FICO Credit Score
Your credit score is made up of 5 influencing factors, which impact and make up your credit score, known as FICO. These factors will contribute to your creditworthiness. The more creditworthy you are, the more likely you are to approved for a credit card or various types of loans.
- Payment History – 30%
- Credit Utilized – 35%
- Length of Credit History—15%
- New Credit—10%
- Types of Credit—10%
Credit Related Myths
Let’s get some myths out of the way:
Myth 1: Paying the minimum balance is okay.
Paying a minimum balance means that you are: paying late fees, therefore taking away from the positive gain of the points you’ve earned; seriously hurting your payment history (30% of the pie!), and appearing to be borrowing more money than you have.
Myth 2: Won’t applying for a new credit card seriously damage my credit?
Every time you apply for a credit card–or any type of credit–your score is dinged a few points. This falls under the “New Credit” category. The nice thing is that your score recovers pretty quickly (think 3-4 weeks) from those applications. You can minimize the impact of credit pulls by applying for multiple cards from the same bank on the same day.
Expert Tip! Applying for a Chase, American Express or Bank of America Card? Apply for two within the same calendar day and your credit pulls will merge from 2 (or 3) to 1 on the report.
Myth #3: Using my entire credit line is fine, as long as I pay it back on time.
The biggest percentage of the pie is ‘credit utilized’. My recommendation would be to have no more than 10% of your total credit (amongst all your cards) post at any given time. This doesn’t mean if you have a $10,000 credit line you can’t use $8,000; rather, this means if you’re using $8,000 of that total line, be sure to pay off $7,000 or preferably more, (so your balance is $1,000 → <10% of your total credit used).
Myth #4: Denials hurt my credit score.
The only part about a denial that hurts your score is the credit pull, or “inquiry”. If you’re not approved, you’re not adding new credit or lowering the average age of accounts.
Credit Inquires and New Accounts
Let’s take a moment to talk about credit inquires. Every time you apply for credit, the bank will pull your credit report from one of the three major credit bureaus. Credit inquires (only 10% of the pie) slightly effect your overall score. Don’t worry–even with a denial (Myth #4), your score will bounce back.
Opening up new accounts is not completely risk-free.
New accounts on the other hand, do affect your score. They also fall under the “new credit” slice, but more importantly, they affect the average age of accounts–15% of the pie. Every time you successfully open up a new credit account, it will lower your average age. Tools like Credit Sesame/Karma show you your average age.
The two most important factors affecting your credit score and health will always be your amount of credit used and history of on-time payments. Keep those in check and you’ll be on your way to a health credit lifestyle.
Tools I Use
There are three major credit bureaus: Experian (EX), Transunion (TU), and Equifax (EQ).
Monitoring if your real credit score and report costs a fee, but now several banks and credit card issuers provider their customers with free scores updated every few weeks:
- AMEX: Provides access to Experian credit score
- Chase: Provides access to Experian credit score only for Slate cardholders
- Citi: Provides access to Equifax score with many of their products
- Discover: Provides access to Transunion score with many of their products
- Barclays: Provides access to Transunion score with many of their products
Chances are you have a card from one of the above banks. Don’t be super concerned by your score–checking it everyday will only drive you crazy, but it’s a good tool for monitoring nonetheless.
Free websites like Credit Karma and Credit Sesame do not provide you your real FICO Score, but they are great places for monitoring your EQ and TU credit reports–they’ll show any delinquencies, late payments, new accounts, percentage of credit utilized and recent inquiries on EQ and TU. Signing up is free and it’s a good way to keep eyes on your report.
Here is a great resource that shows you user data on what score people have had when applying for certain cards. You search based on bureau, state and/or name of card. I typically search by state (New York) and the card I’m looking to apply for:
Here are the results:
Everything listed here is an approval. It goes without saying that not everyone who’s ever applied for this card has gotten approved, but it’s a good place to start if you’re on the fence about applying for a specific card. The comments also give further information. Can be pretty useful.
Creditworthiness & Consumer Responsibility
The above information can help you repair your creditworthiness if it’s been damaged, but also help to allay your fears about applying for credit cards or anything else related to your credit health.
The most important aspect to maintaining a solid credit score, best rates and highest chances for approval is to be responsible with the credit allocated to you as the consumer. The more responsible you are with the credit, the less likely the banks will view you as a risk. Less risk means more approvals for you, and ultimately more rewards.
There’s a lot of information (854 words!), but one last piece of information: if you’re going to be applying for a large loan (refinance, home equity, mortgage, etc.) you may want to think about the volume of credit card applications you are, or will be pushing.
Feel free to ask any questions in the comments!
Up next on Mining for Miles: “Beginner’s Guide Part 1: Everything You Need to Know to Get Started”.