As I have shared the story of our reduced-cost travel with friends and family I have heard a common line of feedback:
“Signing up for credit cards like that must have killed your credit score!”
Though it’s understandable people may think that’s the case, the reality is exactly the opposite – my credit score is at 825! I write that not to brag, but to allay the concerns that many have – that taking advantage of lucrative credit card offers will crush your credit score.
This Infographic Shows My Credit Score History as I Opened and Closed Cards
Many writers will talk about their credit score history in general, vague terms. I’ve gone much further. I created an infographic by overlaying my actual real-world credit card account opening and closing information on top of my actual real-world FICO credit score history plot from my Discover It card.
You may wonder how my credit score can be very strong when I hold many credit cards. The answer is actually pretty simple: your credit score is not generally harmed by having a lot of credit cards.
Having Many Credit Cards Can Improve Utilization Ratio
In fact, by having many credit cards you will most likely increase your available credit and that means that your credit-used to credit-available ratio (also known as credit utilization ratio) will be low. That is viewed positively by creditors. As always, the key move here is paying off your credit card bills in full each month as on-time payments are the number one element to a high credit score. On the flip side, if you’re paying interest on credit card balances you’re offsetting the gains you might be getting in points or miles.
More Details on How Your Credit Score Is Calculated
Your credit score is driven primarily by your payment history and the amounts you owe.
It should go without saying but the most impactful step you can take to achieve and maintain a high credit score is to pay your bills on time. Creditors consider your payment history the biggest indicator of future financial behavior. The impact of negative remarks on your score will of course be reduced over time but those remarks are factored in to some extent for up to seven years.
Coming in second in terms of importance, just behind payment history, is the amount you currently owe to creditors. A creditor isn’t going to be very generous in lending to you if you already owe others large amounts.
The actual absolute amount of credit you’ve utilized is considered but perhaps even more importantly, the amount you’ve borrowed is compared against the credit that’s been extended to you, to calculate your credit utilization ratio. Creditors want to see that when you’re extended credit, you don’t go overboard and run up large debt haphazardly. This is an area where having more credit cards can actually help raise your score. The additional credit lines associated with additional cards actually contribute to keeping your credit utilization ratio low, which positively affects your credit score.
Related Page: Key Travel Gear for A Long Honeymoon or Vacation Consider grabbing these items for yourself or friends and family members that travel.
Length of credit history accounts for 15% of credit score calculation. Of course you can’t create a long credit history out of thin air but you can make a concerted effort to keep longstanding credit accounts open to increase the average age of account metric. This is one reason that holding a few cards with no annual fee is beneficial – you can keep them open in perpetuity, free of charge, improving the length of your credit history.
New credit only accounts for about 10% of your credit score calculation. This surprises many people who think that opening a few credit cards will cause a major hit to their credit score. The reality is that applying for a new card or cards will usually have only a small impact (2-3 points) on your credit score, and that impact is very temporary. The reason for that is that opening a new account usually prompts a “hard inquiry” from the bank. However, the small impact of a hard inquiry fades away after a few weeks.
How to Get Your Credit Score for Free
It’s a good idea to check your credit score every few months to make sure nothing is amiss with your credit.
Prior to about 2014, checking your real FICO credit score (not a 3rd party’s estimate) usually cost you about $10. That changed though when FICO started a program they call FICO® Score Open Access. The program allows creditors who have already paid to get your credit score the option to share it with you free of charge. Consequently many credit card companies now offer customers their credit score free, usually updated on a monthly basis.
You can get a free look at your true FICO®credit score with these credit card providers (log into your account online or check your monthly statement):
- American Express is providing free FICO credit scores, based on Experian credit reports, for all personal and consumer cards. From Elizabeth Costa, vice president of public affairs for American Express: “The FICO score we provide is the FICO Score 8 … based on data from Experian. This is the actual credit score used [by Amex] to manage card members’ accounts.”
- Discover is providing free FICO credit scores, based on Transunion credit reports. Discover provides, online, a clear graph of your credit score history of the past year.
- CitiBank is providing free FICO credit scores, based on Equifax credit reports, to select cardmembers. A credit score history is also offered online.
- Barclaycard is offering free FICO credit scores, based on Experian credit reports, to all cardholders, online and on monthly statements. A credit score history is also offered online.
- Chase surprisingly seems to still only be providing free FICO credit scores to holders of their Slate credit card.
Of course your credit score is a numerical summary/reflection of your credit report. Under the United States’ Fair Credit Reporting Act (FCRA) you are entitled to a free copy of your credit report from each of the three major credit bureaus once every 12 months. Be careful as there are all sorts of sites designed to trick you into believing you’re accessing the government-mandated reports when they’re not the “real” site. The official site you should use is annualcreditreport.com (or you can call 1-877-322-8228).
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If you have questions on this topic, please feel free to post them in the comments section below and I’ll be happy to address them.