Myth Series #2: Opening lots of Credit Cards hurts your Credit Score–False!
By far, the easiest way to accumulate significant numbers of points and miles for high value travel is through credit card sign-up bonuses. As I have written previously, here, this practice assumes that you have decent credit and can effectively manage your budget. However, many people have asked me if opening several credit cards at once or having numerous different credit cards hurts my overall credit score. The simple answer is, no!
How your credit score is determined
Your credit score is calculated from several pieces of data found within your credit report. For the FICO score (the most popular type of credit score), as an example, they look at the following:
* Payment History: 35%
* Amounts Owed: 30%
* Length of Credit History: 15%
* Credit Mix: 10%
* New Credit: 10%
Keep in mind that people with a short credit history, or little credit information in their credit report will be weighted differently. However, for the majority of individuals out there with several years of credit history, this is the typical weighting that goes into your FICO score.
If you notice, new credit is only 10%–so, your score will be affected by opening several new accounts within a short period of time. The reasoning behind this is simple and actually logical: the credit companies have research showing that individuals who open several new accounts in a short period are a higher risk than those who do not. Basically, the statistics show that if you are opening a bunch of new credit, you could max it and then not be able to pay it back. Of course, to really win in this hobby, you have to pay off your credit card bills each month so that you don’t get charged with absurdly high interest rates–effectively negating the value of the points/miles you are earning. If you do not think you can pay off the bills after meeting any required minimum spending, I would recommend not applying for a travel credit card–there are better options out there if you want to carry a balance. Additionally, I recommend opening one or two new cards first to try it out before you start opening multiple cards and fully diversifying your miles portfolio.
How your score is Affected
Believe it or not, my credit score has gone up significantly over time since I started playing the points/miles game. Initially, after each round of new credit card applications (sometimes up to 3 in a day), my score took about a 10-15 point drop. However, this drop is temporary. The credit score takes into account the TOTAL amount of credit you have available versus the balance–so, if you have a total line of credit of $100,000 over multiple cards, but are only using $5,000 of that total amount over any given month, it actually looks better to the credit companies than someone who has a total line of credit of $20,000 utilizing the same $5,000 over a given month.
However, because you can expect a small initial credit score drop, you should not apply for new credit cards before any major purchases where you will be applying for a loan–like a home or car purchase.
Setting your travel Goals–First!
Many newcomers to this hobby make the mistake of just applying for a bunch of different credit cards, without really having a travel goal in mind. I am guilty of this as well–I applied for my first travel cards based on the sign-up bonuses, rather than pick and choose what cards were going to get me the miles to get me where I wanted to go. It ended up working out ok eventually, but it is a lot easier to set your goals first, then apply for the right cards which will maximize your ability to meet those goals.
In order to effectively play this game, you need to stay organized. If you are not used to having more than one credit card, or belonging to one or two loyalty programs, you will have to develop a system to keep track of everything. Forgetting to pay a credit card bill on time will sink you quickly in this hobby–hurting your credit score, and earning you lots of extra fees instead of valuable miles.
You will not damage your credit score by opening multiple credit cards over the long term–in fact you will likely see an increase. However, you must ensure that you are paying your bills on time and in full. By staying organized, you can apply for credit cards that will meet your travel goals, and soon you will be traveling for almost free to the destination of your dreams.