Points and Miles 101: Don’t Waste A Good Credit Score

Many newcomers to the points and miles hobby believe that opening new accounts can be damaging to their credit score. That fear can be magnified for FICO scores over 750, leading to a situation where a consumer avoids taking on new credit.

The truth is very different. If you open new accounts at a reasonably spaced interval and manage your credit responsibly, acquiring new cards can actually improve your score. In fact, if you have a credit score north of 750 and have no plans to buy a house or apply for a mortgage, you’re wasting a good credit profile by not using it. While a new account may initially ding your score by three or five points, you’ll recover quickly with the aid of good money management.

For starters, let’s look at the components that make up your credit score. There are many different scoring systems, but most lenders rely on your FICO score, a three-digit number introduced in 1989. There are different versions of the FICO score, but the classic one ranges from 300 to 850 (the bankcard score and auto score go from 250 to 900). All of your personal accounts are reported to Equifax, Experian and TransUnion, the three major credit bureaus. Your classic FICO score is based on these components:

  • Payment history (35%): The most important thing to lenders is whether you pay your bills on time. A few late payments won’t kill you, but liens, judgements, charge-offs and foreclosures are the kiss of death, along with chronic late payments.
  • Amount of debt (30%): It’s fine to owe money, but the most important thing is how much of your available credit you’re using. A high ratio of debt to credit indicates high risk to potential lenders; most experts say to shoot for a ratio in the range of 5-10%.
  • Length of credit history (15%): This is an important factor. Lenders will look at how long your accounts have been open (particularly the age of your oldest account) as well as the average age of your accounts. For that reason, it’s important not to close older accounts even if they’re idle.
  • Credit mix (10%): Someone considering lending you money will analyze how much of your credit comes from credit cards, retail accounts, and car and mortgage loans.
  • New credit (10%): People who have opened a large number of accounts in a short period of time are regarded as a classic risk, especially those who don’t have a lengthy credit history.

When you analyze these factors, a pattern emerges: responsible people with large amounts of available credit are much better risks than those with one or two cards and a short credit history. Is $2,000 a great deal of credit card debt? If your available credit is $40,000, the answer is no—a 5% usage indicates that you understand how to manage money. If your total credit is $5,000, it becomes a very different story—your $2,000 in debt translates to 40%, which puts a red flag on your profile.

Here are the most important factors when it comes to opening new accounts and safeguarding your credit score in general.

Monitor Your Credit

Sign up for a system such as Credit Karma or Credit Sesame, which allows you to check both your score and your credit report and keep track of any fluctuations.

Apply for New Accounts at a Measured Pace

A good rule of thumb is to wait 4-6 months between applications. Make a wish list of the credit cards you want and prioritize them; otherwise, you run the risk of appearing desperate for cash. Remember that lenders also look at the number of new account inquiries on your credit report.

However, when applying for a mortgage or car loan, focus your applications in a short period of time. This seems like the reverse of the advice given above, but you could easily apply three or four times in either situation. If you file those applications within a week or two, the system will pick up on what you’re doing and count them as one.

Don’t Close Your Oldest Accounts

Age of accounts is an important factor in computing your credit score, so you want to leave older accounts open even if you’re not using them.

Keep Your Balances Low

In a nutshell, keep your balances low relative to your available credit. Other than paying your bills on time, this is the most important factor on building a solid credit profile.

Be Strategic in Your Applications

Only apply for the credit you really need. Resist the temptation to succumb to attractive bonus offers.

Whatever You Do, Avoid Carrying a Balance

This advice goes way beyond how your credit profile looks to a prospective lender. Credit card interest rates fluctuate according to the borrowers’ creditworthiness, rates of 20% or more are not unusual, and monthly charges can escalate very rapidly. If you can’t pay off your balances each month, don’t collect points and miles.

When You Shouldn’t Open New Accounts

Don’t open new accounts if you plan on buying a car or house. This applies in particular to mortgages, and you want to be very careful if you know a home purchase is on the horizon. Remember that the reverse is also true: If you have a good credit score and no plans to take out a mortgage or auto loan, you’re wasting that score by not using it.

Source: frugal travel guy

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