There are definitely benefits to using credit cards to earn points to help you travel more cheaply. For some people opening up credit cards and using them responsibly makes perfect sense.
While other people have a little more concern when it comes to opening up multiple cards in a short amount of time. One of the biggest concerns that people have when it comes to opening up credit cards is the effect that it can have on their credit score.
So, let’s take a look and see how opening up credit cards is going to affect your credit score.
What is a credit score?
A person’s credit score is typically a 3 digit number that represents how likely they are to pay your bills on time.
There are a number of different credit scores and the higher your score the better it is for you. Scores generally are between 300-850.
Factors that Go Into Calculating A Credit Score
There are a number of factors that go into calculating a person’s credit score. They include the following factors:
- 35% of the score is based off of payment history (percentage of payments on time)
- 30% of the score is based on your credit utilization (amount of credit you have versus what you are using)
- 15% of the score is your credit age (average age of all your credit accounts)
- 10% of the score is the types of credit or mix that you have (the variety of credit that you have)
- 10% of the score is your request for new credit (times you have applied for credit)
As you can see, 80% of your score is made up of payment history, credit utilization and credit age.
Payment history and credit utilization are high impact categories. Credit age is a medium impact area. Types of credit and requests for new credit are low impact areas.
How Applying for Credit Cards Can Lower Your Credit Score
The main way that applying for a credit card can lower your credit score is that once you apply for a card, the credit card issuer will make what is called a hard pull on your credit. Again, this makes up 10% of your credit score and it has a low impact on your score.
For most people, this will drop your score by a few points. It can be a little more but it won’t be anything substantial. Your credit score will recover in a couple of months.
The pull itself will stay on your credit report for two years before it eventually drops off of your report.
The only other downside to opening up a credit card is that it can drop your average age of your credit. For example, if you have 4 credit cards and your average age is 10 years for those cards and you add a new card, your average age would drop to 8 years.
The key when applying for new credit cards is to keep the older cards that you have in your mix always open. Even if you downgrade a card to a no annual fee card, you will want to keep the same number of cards so that the age of your credit keeps the same age.
How Credit Cards Can Influence Your Credit Score in a Positive Way
Even though there are some downsides in getting a new credit card, as I mentioned before they are very minimal in the effect that it will have on it.
The upside in getting a new credit card outways the negative side of getting one. The reason that it has a bigger positive impact is because it raises your available credit. If you remember, credit utilization makes up 30% of your credit score.
For example, let’s say that you have two credit cards with a total credit limit of $10,000 between the two cards. If you have charged $3,000 on those two cards, you would be using 30% of your available credit.
The higher the utilization is the more negative impact it will have on your credit score. The credit bureaus feel that using 30% or more of your available credit is not a good thing.
Now, let’s say that you have gotten two new additional credit cards and your total available credit is now $50,000. If you have $3,000 charged total for all of the cards, your credit utilization would only be 6% which would positively affect your credit score.
By having more available credit and keeping your utilization low shows creditors that you use your credit responsibly which raises your overall score.
Reasons to Have Credit Cards
One of the reasons to have credit cards is that they can help you build your credit. Unlike debit cards which do not help you build credit. Plus, debit cards don’t have the same protections that credit cards do.
If you want to get into the points game, you can follow the 5/24 rule. You can read my post titled “Introduction to the 5/24 Rule” to learn more about it. A couple of cards to consider with that approach include the Chase Sapphire Preferred or the Chase Sapphire Reserve credit cards.
There are other credit cards that can help you maximize points as you try to accumulate them. The American Express Gold Card offers 4x the points at restaurants and grocery stores up to $25,000 in a year.
Some hotel cards offer you perks with free night certificates on the anniversary dates like the World of Hyatt credit card and the Hilton Honors American Express Aspire card.
Airline credit cards like the Delta SkyMiles Reserve American Express card offers free checked bags and Delta Lounge access. The American Airlines Citi AAdvantage Executive Mastercard offers Admirals Club Membership along with Global Entry or TSA Precheck.
If you don’t want to get into the points game, you may want to consider a cash back credit card. A couple cards that offer 2% cash back include the Wells Fargo Active Cash card and the Citi Double Points credit card. They both don’t have an annual fee.
Other cards that don’t have an annual fee and fit into the 5/24 plan include the Chase Freedom Flex and the Chase Freedom Unlimited credit cards.
Where to Check Your Credit Score
There are two sites that I like to use when it comes to checking my credit score. The first is Credit Karma. Credit Karma is a free site. You will need to answer a few questions to set up your account. They don’t ask for any credit card information.
You will receive two credit scores. One is a TransUnion score and the other is an Equifax score. They aren’t going to be exactly what your real credit score will be but they will be close.
The other site that I like to use is Equifax. Like Credit Karma the Equifax site is free. There are services that you can pay for on their site but you don’t need to. Equifax gives you one score and it is updated every month.
Final Thoughts
Most people think that the more credit cards that you have the worse it will affect your credit score. As I have shown this is a huge misconception and is the opposite if you use your credit cards wisely.
In the short term, your credit score will be dinged for opening up credit cards but that is going to be short lived.
As you do apply for cards, make sure to keep the oldest cards that you have open. Next, make sure to keep your credit utilization low.
Finally and maybe the most important thing, make sure to pay your credit card in full each month.
If you want to learn more about credit cards and travel, you can go to TravelWidstom.com.
