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One of the more confusing aspects of rewards travel is how applying for credit cards affects your credit score. Conventional wisdom has it that applying for more credit cards will negatively affect your credit score, and is somehow frowned upon by lenders and credit providers. But that’s not the case.
Your credit score takes a temporary dip when applying for new cards, particularly if applying for more than one in a short time span. But provided you keep your credit utilization rates low, pay your credit card accounts on time and in full every month, and incorporate your rewards cards into a well-balanced credit portfolio, adding more credit cards to your points and miles arsenal can increase your credit score over time.
Before we dive into how rewards cards affect your credit score, we need to call out that if you can't pay your credit card balance off each month, then your rewards points will provide a negative return. How? Expect to pay well over 10% interest on your utilized credit to earn 1-6% in points, miles, or cash back, quickly wiping out any tangible gains you make. Before you enter the cat and mouse world of award travel, recognize that it is a game of thin margins, and spend appropriately.
How Are Credit Scores Calculated?
Our post on how to manage your credit score covers this in more depth, but just to recap, credit bureaus calculate your credit score on the following criteria for your FICO score:
- 35% Payment History – late payments represent a much higher credit risk for lenders
- 30% Amounts Owed – also referred to as credit utilization rates or available credit vs. how much is in use
- 15% Length of Credit History – average age of revolving debt accounts
- 10% New Credit – hard pulls and new accounts show here
- 10% Credit Mix – entire lending portfolio i.e. car loans, mortgages, guarantor accounts, credit cards, etc
Essentially, lenders want to see you diversifying your credit portfolio over a sustained period, paying your bills on time, and keeping your utilization rates low. If you tick all these boxes, credit providers are often more than happy to offer you new cards and financial products, as you represent a ‘safe bet.’
We recommend keeping a close eye on your credit score, checking it weekly via a free FICO access offered on cards like the Barclaycard Arrival Plus® World Elite Mastercard® or The Amex EveryDay® Credit Card from American Express. Alternatively, use a service like Credit Scorecard from Discover or Credit Karma to ensure cards and payments are updating on your credit file correctly. This way, if anything untoward pops up that gives you cause for concern, you can immediately address the issue. For even more options, check out the full list of free credit score and reporting websites.
Why Do Credit Scores Dip When You Get a New Credit Card?
When you apply for a new credit card, the credit provider performs a credit check, otherwise known as a ‘hard pull.’ A hard pull helps them decide whether you’ll receive approval for the card, the amount of credit you'll be provided, along with the interest rate you'll hopefully never pay. Hard pulls or credit inquiries cause a small, temporary drop in your credit score. Expect a 2-5 point immediate drop per inquiry — this could be higher if you have limited credit, which you should expect for someone getting their first credit card.
Too many inquiries in a short space of time will cause a more pronounced dip in your credit score, one of the reasons we recommend spacing applications out over a longer period. The dip in your credit score starts to fade within weeks of the application. Typically you'll see the impact from that inquiry gone within six months and at the 12-month interval that hard inquiry likely has no impact on your credit score (depending on the exact scoring model and version used.)
From this point on, provided you follow the credit card best practices set out above, your credit card should start adding points to your credit score, helping to increase your credit score over time.
How More Credit Cards Can Help Raise Your Credit Score
Holding many credit cards can help raise your credit score by lengthening the combined age of your credit accounts, lowering your credit utilization rates, diversifying your credit portfolio, and showing your ability to manage a significant amount of revolving credit responsibly. All factors that play key roles in calculating your credit score.
Extend the Length of Your Credit History
One of the key factors credit agencies look at when calculating your credit score is how long accounts have been open. Having just one or two accounts open for a short length of time may count against your score initially, but over time it adds to the overall length of your credit history, gradually increasing your credit score. One of the reasons we recommend downgrading credit cards to small or no fee versions where possible, as opposed to canceling products outright, is credit lines with a long history can add meaningful weight to your credit score.
Reduce Your Credit Utilization Rate
Credit utilization plays a huge role in determining your credit score. Almost a third of your credit score is calculated by the way you use existing lines of credit, with lower utilization rates looked upon more favorably than high ones. So, how do more credit cards help lower your utilization rates? Provided you maintain similar levels of spending to before you expand your rewards card portfolio, adding more available lines of credit, and increasing the overall credit available lowers your credit utilization rate.
For example, if you have one credit card with a $10K limit and you charge $3K during the month, your utilization rate is 30%. If you have five credit cards with $10K limits for a total of $50K available credit, and you charge $3K during the month, your utilization rate is 6%.
- One credit card with $10K limit and you charge $3K per month: Utilization rate 30%
- Five credit cards with $10K limit ($50K total) and you charge $3K per month: Utilization rate 6%
So, can more credit cards help increase your credit score? Absolutely! If used responsibly and paid off in full each month, rewards-earning credit cards can not only help push your credit score higher but can provide access to amazing travel experiences at pennies on the dollar. And, higher credit scores equal better cards and better interest rates that you'll hopefully never use!
If you want to live in the points and miles world for the long-term and exchange credit card rewards for excellent travel adventures, you need to look down the road, not just now. Mix up the types of credit you access, don't apply for too many cards in a short space of time, keep your credit utilization rate low, and pay your accounts off in full each month. And make sure any card you pick up helps you focus on your travel goals.
If you have any questions or something to add to the conversation, we’d love to hear from you in the comments.
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