Here’s How to Manage Your Credit Score When Signing Up for Rewards Cards

Reader Craig asks,

Could you clear up a general question many newbies have about the credit card sign-up strategy. I love the idea of signing up for a card, getting the 50K miles or whatever… I’m always told that this will kill my credit score, i.e. opening and closing cards like this will negatively effect my credit. Any general sense of whether is is true or not, and if it is true, how big is the impact really?

I’ve signed up for scores of cards over many years and I still have an excellent credit score, it was nearly 800 FICO on the three major credit bureaus when I went to get my mortgage. In part because of signing up for more cards, rather than in spite of it.

In fact, here’s my latest Barclays-provided free FICO score:

I first discovered rewards credit cards in 1997. I signed up for a US Airways card, enticed by the bonus. I decided I didn’t want to pay an annual fee for a credit card back then. My income – and thus my spending – wasn’t very high. So I cancelled the card right away. They still let me keep the bonus, though, which I thought was really nice of them.

When I finally did the math and realized it made sense to earn rewards even with an annual fee I applied for that same card again, and they gave me the bonus again. I thought that was really nice of them. And I learned that if a bank liked me once they were quite likely to keep liking me.

The Key to a Understanding Your Credit Score and Improving It — and When it Matters Most

I didn’t know much about credit scores back then, I just knew that I was earning lots of miles for things other than flying. I paid my bills on time, and I wasn’t in search of tons of credit. And that meant I pretty much always got approved, and having requests for credit never hurt me.

The first two lessons.

  • The most important thing for a good credit score is paying your bills on time.
  • You care most about your credit score when seeking significant credit for things like a residential mortgage.

Avoid Credit Cards If You They Cause You to Spend More Money Than You Otherwise Would

For the most part the availability of credit cards hasn’t increased consumer spending — it’s shifted how that spending is financed. We don’t use layaway or store credit very much, for instance. And high interest (even higher than credit cards!) personal loans are far less common than they used to be.

But there are certainly folks who will spend more because they can. Or because it’s somehow deemed worth it to meet a card’s spending requirement. I want you to understand if you’re one of those people.

If you don’t pay your bills in full and on time, or if you’ll spend more just because you have a credit card, then you should stay away from rewards credit cards.

The key is to be honest and reflective with yourself. You need to be meta-rational. The most important question isn’t whether your credit score is high enough to get credit, but how you’ll behave once you get it.

As I wrote in “This Game is Not For You If..” the most important consideration when playing the miles and points game with financial products is:

  • Do you pay off your bills in full each month?
  • You must not spend more than you otherwise would because you’re using a credit card or justify extra spending “because you need it to get a signup bonus”

If you don’t or can’t pay your credit cards in full, then interest rates are far more important than the points or rebates you’ll earn. If you spend more when you get more credit you’ll be giving up more than you get.

So if your score goes up, you find yourself better-positioned to sign up for credit cards, focus on these two issues when deciding whether you should get cards even if you can.

Avoid Card Signups – And Other Requests for Credit – in Advance of Major Purchases

My general view is that if you satisfy these conditions, you still want to avoid cards if you plan to be in the mortgage market over the coming 1-2 years. In any case, a score of 760 or higher will generally qualify you for the best lending rates. Scores over 760 don’t make you meaningfully better off.

In fact, some would argue that if your score is over 760 you’re ‘wasting’ your credit…

Requesting Credit Reduces Your Score.. Usually a Little Bit, and Just Temporarily

Getting a new card, or generally requesting credit (causing a ‘hard pull’ on your credit) will reduce your credit temporarily by a few points. If you are asking for credit, perhaps you need credit and aren’t such a great risk.

Getting Approved for Credit Can Improve Your Score

Having more available credit can improve your credit. It pushes down your utilization ratio — the amount of total available credit you’re using in a given month.

If you spend $3000 on cards (even if you pay off the cards in full) in a month and have $5000 in credit, you’re using 60% of your available credit. If you spend the same amount but have $30,000 in available credit your utilization rate is just 10%. You have credit, don’t use it, and show how responsible you are with credit. That’s far more significant than how many cards you request.

I Try to Keep My Credit, Even When I Cancel Cards

When I cancel cards, I often try to retain the credit. Chase generally lets you move your available credit from one card (the one you’re going to get rid of before a fee hits) onto another card (that you’re keeping). American Express has frequently offered the ability to move around your credit between cards as well.

Cancelling a Card Can Reduce Your Score.. in 10 Years

I keep my oldest cards, and no fee cards generally, but even when you cancel a card it stays on your report until it ages off after a decade — so cancelled cards can increase the average age of your accounts, one factor in your credit score. The more responsible with credit you are over long periods of time improves your score.

Note that this is true for traditional FICO scores but the less-used Vantage scores do not continue to use cancelled accounts in calculating average age.

We Can Easily Become Too Obsessed With Scores and Inquiries

I admit I don’t even bother checking my credit anymore before I sign up for cards. I’m not doing 10 at a time. I’m not balancing my inquiries across the credit bureaus, there aren’t enough offers that I either haven’t had or can get again in the near term that I have that luxury. So I’m just balancing my card applications across banks. I’ll try to apply for one card from each of the co-branded issuing banks at a time, subject to decent offers being available

If you’re truly at a margin where an inquiry will trade off with another one you might make, if you’re signing up for literally scores of cards each year, then you may want to be more vigilant than I am.

I’m often surprised by the low credit scores that often get approved for top end credit cards.

The real hardcore folks will manage the inquiries on each credit bureau, there are forums over at Credit Boards where people list which bank runs credit through which bureau in each state. So if you have too many inquiries on one bureau you can apply only to banks that will pull your credit from another one.

I don’t really get rejected from cards, my credit is good, and I don’t have a major purchase like a house (or a refinance) on the horizon. So I don’t even monitor my credit score closely, I just do irregular housekeeping to make sure nothing is on my credit report that shouldn’t be by mistake.

The Most Important Thing to Worry About Is…

Pay your bills on time and don’t max out your credit and your credit score will generally reflect that, and you’ll be deemed a good enough credit risk to be able to get more credit. Because what financial institutions are most concerned with is whether they’ll get their money back.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. In the short term, one’s credit score can take a big hit.

    I carry almost no balance on my credit cards. I have a total credit line of about $120K. A couple of months ago, my debt to credit ratio stood at an astounding 1% and my FICO score was 829. The reason it was not “perfect”, according to AMEX CreditSecure, is that I have never taken out a mortgage or purchased a home.

    Then I got busy and my FICO score took a dive.

    First, I decided to acquire the no-fee HHonors Citi Visa after I got rid of the Citi Reserve card for being unreliable in awarding bonus points for hotel spend. After I got rid of the Citi Reserve card, which was the most recent acquisition in my wallet, my FICO score ticked up a bit, because the length or age of my credit history went up without the newest card in my wallet (the mean credit age went up). Then, when I applied for the no-fee Citi HH visa, my FICO score got a significant hit, decreasing from 829 to 810, and there were two reasons for this: (a) applying for the new card generate a hard inquiry with one or more of the credit bureaus and (b) getting the new card again decreased the mean age of my credit history. Although I was approved for the Citi HH card with a hefty credit line of $22K, this apparently could not offset the other two negative factors to keep my FICO from dropping 19 points.

    Then last week, I decided to book flights for all the trips that I am planning to take for the rest of the year — 5 of them, all revenue tickets. When I was done booking, my debt to credit ratio went up from 1% to 6% and my FICO score dropped precipitously to from 810 or there about to 790, where it is at the moment. I just repaid all the credit cards for the plane tickets I purchased, which will decrease my debt to credit ratio back to 1-2%, but it will take about another month before I know how much of my score will be restored. With time, it will be go back up since I do not plan on applying for credit cards any time soon.

    So, it is a bit simplistic to say that applying for and getting rid of a bunch of cards does not hurt one’s credit score. It is a balancing act in which one does well if one manages and uses credit responsibly. Paying on time is a big factor, but multiple hard inquiries will decrease a credit score; a bunch of new cards would decrease the mean credit age; etc…How much these factors hurt one’s credit score depends on the shape one is in with respect to all the other factors that determine the overall score.

    It is a balancing act. Just make sure you can maintain the balance 😉

  2. Gary, I really appreciated that February post indicating that some cards were accessible to people like me with lower scores. With an Experian FICO score of 618, I didn’t think I was anywhere near being able to get in the game, so to speak.

    That post prompted me to apply for the Southwest Premier card, and I was approved. The next month, I got the US Airways card with a Transunion FICO score of 625. Since then, I’ve gotten these cards: Club Carlson (and made hay with it before the end of BOGO), Southwest Plus (and the companion pass), Citi AA Plat, Wyndham, Amex BRG, and Capital One Venture. I’ve taken my daughter on two trips paid for with points and miles, and I have several more coming up that already paid for with points and miles, including trips to Belize and Iceland.

    Most people in this hobby strongly discourage those with sub-700 scores from doing anything. Yes, some people have bad credit because they are bad at managing money, but some of us ended up with bad credit because we had to pay lawyers $10,000 at the same time all our money was tied up in a divorce. I owe you a debt of gratitude.

  3. One of the smartest and easiest ways to increase your FICO score is to pay your monthly credit card bill the day before the statement date. Almost all credit card issuers report the outstanding card balance on the statement date. Paying a day early will reduce your reported balance to zero each month.

    By the way it really doesn’t matter if your FICO score is 850 or 720. A score of 720 should get you the same number of cards as a score of 850.

  4. A minor error in your otherwise excellent article: Obsolete information must be purged after 7 years, except for bankruptcies, which stay on the credit report for 10 years. Fair Credit Reporting Act, 15 U.S.C. Sec. 1681c(a). Exceptions to this are credit extensions of more than $50,000 (e.g., mortgage applications), employment applications where the salary is more than $20,000/year, or life insurance applications with a principal amount of $50,000.

    As is obvious, the Congress hasn’t revisited this law in almost 20 years, and the exception amounts were never indexed.

  5. In regards to how long a bankruptcy stays on the credit report….

    I just days ago got turned down on a Citi Platinum card with Aadvantage tie in. I had a bankruptcy TWENTY NINE YEARS ago. Still shows on Experian and Citi tells me that their policy is no biz card if you EVER had a bankruptcy.

    I wish I could change what I did in my early twenties but no way to do so. I argued with the guy and got transferred a couple times and he was even sympathetic, but to no avail.

    If anyone knows a work around for this kind of thing, let me know!

  6. @dcs, my experience was similar to yours. When I started collecting/churning cards about 2 years ago my credit scores dropped abruptly from over 800 to the 770-795 range. But I don’t think it actually matters much. 780 is still considered “Excellent” by most lenders. On a few cards I got assigned a slightly higher APR than their “best” offer, but I never carry a balance anyway, so who cares?

    However, credit scores do not tell the whole story. Some banks will deny credit to folks with a habit of taking out “too many” credit cards in a specified period no matter how high their credit rating may be. First Bank of Omaha has a history of this (and I was denied a crappy little Sun Country card the first time I applied for this reason). Recently Chase has cracked down hard on folks with more than 5 card applications within the past 24 months.

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