Sunday, December 22, 2013

Does applying for credit cards ruin my credit score?

When it comes to finances, we have enough to worry about: saving enough for retirement, paying the rent, buying a house, buying a car, paying the bills, entertainment expenses, etc.  Wouldn't it be great if you didn't have to worry about your travel expenses?  Wouldn't it be great if your airline tickets and hotel stays could be paid for with credit card rewards points instead of cash?  

This is where travel hacking comes in.

By taking advantage of credit card sign-up bonuses, doing some manufactured spending (Amazon paymentsVisa gift cardsVanilla Reload cards, and more) and using our credit responsibly, we've been able to generate a large amount of airline miles and hotel points to use for our vacations over the last 2 years.

We open many credit cards on a regular basis, usually opening 1 or 2 cards at a time every few months. 

When people hear about how me and my wife have been traveling for free on credit card rewards points, I often get asked 2 main questions:

Does applying for credit cards ruin my credit?” and “What do you do when you get an annual fee?”

Today I will answer the first question.

Applying for credit cards does NOT ruin your credit.  I will talk about what to do about annual fees tomorrow (read here).

Here's a list of some of the places we have traveled this year for free on credit card points:
- Bahamas for our honeymoon at Atlantis
- Several flights to Portland, Oregon to visit my wife's family which I've written a little about here and here
- Several flights to Las Vegas, Nevada one of which I've written about here 
- Several free nights in Atlanta, Georgia
- South Korea, Taiwan, and Hong Kong on our trip to Asia paid for with airline miles

And what's going on with my credit score? Last I checked, my FICO score was 808.

I also check my free simulated credit scores regularly with CreditKarma, Credit Sesame,, American Express, and Quizzle. These sites are completely legit, free and do not do anything shady like charge hidden fees. My simulated credit scores are consistently over 760. My wife doesn't apply for as many cards as I do, and her credit score is slightly higher than mine.

Using credit responsibly, we do not have any credit card debt and our credit scores have actually increased over time.
Your credit score is made of:
35%: Payment History (how timely and consistent your payments are)
30%: Credit Utilization (debt-to-credit ratio)
15%: Length of Credit History (when did you first sign up for a credit card?)
10%: Types of credit used (mix of credit and loans, revolving, consumer finance, mortgage)
10%: Recent searches for credit (Credit inquiries and new accounts)

How does opening a new credit card affect my credit score?
Opening a new credit card will cause you to get a hard inquiry, which may temporarily lower your credit score by 5-10 points. 

Opening a new credit card will also raise your total credit limit, which will lower your credit utilization ratio.  Your credit utilization ratio makes up 30% of your credit score.  After you open a new credit card, in the longer term your credit score will actually increase.

You can read more in a previous post of mine on how to improve your credit score here.

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