Double Duty Daddy

Credit Cards And How They Impact Your Score

credit-cards

 

DD Daddy Reader Lia sent me a message on Facebook looking for clarification on the impact of opening/closing credit cards and how it affects her credit score.

“Because I know it’s so vital to the overall miles game – what are the affects of opening/closing cards and how does it impact my credit score? How do you keep track of your balances on each card and avoid unnecessary fees and penalties? I ask as someone who is really starting to get into the points and miles game but has just dug myself out of credit card debt and have no desire to go back! How do I strike a balance?”

Let me preface this post with one simple statement:

If you are opening up credit cards for miles and points (or for any reason) and aren’t monitoring your credit score, you’re foolish.

I know it sounds harsh but seriously, there are free services at your disposal like Credit Karma and Credit Sesame that allow you to see your FICO Score so there really is no excuse for not knowing where you stand with lenders on this matter. I won’t bore you with details on how your credit score is compiled and the 3 different credit bureaus (Experian, Equifax, Transunion) that formulate your credit score/report but you can read in full details here and see the graph below to understand what makes up your credit score.

credit-score-chart

 

I’ve opened more than 15+ new credit cards in the last 2 years, amassed over 1 million points/miles in various rewards currencies and my credit score has actually improved since 2 years ago. So how does the opening and closing of credit cards impact my credit score? Well the, impact from applying for credit will vary from person to person based on their unique credit histories but for the most part, opening a new account will usually incur between a 3-5 point deduction on your score and closing accounts may do the same. However, if you balance it right, you’ll more than make up for the loss in a few points in 3-6 months if you pay your bills on time and in full, keep your credit utilization at a healthy percentage (use 20% or less of your credit limit if you can) and DON’T carry a balance. Some people say keeping a small balance is healthy for your credit because when the bureaus check, they see that you are using a small percentage and being responsible but I personally hate keeping a balance on my accounts so I don’t carry balances from statement to statement.

My strategy to maintain healthy credit is the following:

  • Keep NO ANNUAL FEE cards open forever that way my ‘length of credit history’ (15% of total credit score) is strong.
  •  Call credit card company when annual fee is due and ask about a retention offer or waiver of annual fee. If nothing is offered, I’ll either keep the card, ask to downgrade to a no fee version (to keep my credit history with the bank going) or outright cancel.
  • Maintain my utilization ratio under 20%. For example: I have a credit limit of 10K on a given card. That month I charge $2000. If I need to spend more, I consider using another card so the utilization ratio isn’t so high on one card. Don’t max out on your credit limit or even come close to it.
  • PAY BILLS ON TIME AND IN FULL.

To answer Lia’s question about how I keep track of my balances on each card and avoid unnecessary fees and penalties.

I keep a simple spreadsheet with the bank name, card name, date issued, credit limit, annual fee, when annual fee is due and notes on what I plan to do in the future with each card. Keep, downgrade or cancel are my 3 options. I’m more than happy to share the spreadsheet with you if you need assistance with organizing your credit cards. Email me at 2dutydaddy@gmail.com

Last word: If you have credit card debt and cannot pay balances in full, do NOT sign up for cards until you are in a better place financially. The majority of people that open new accounts periodically have a healthy 720+ credit score. If you are just getting back into healthy credit again, start off slow by opening a card that suits you best and work on paying it off in full for 6 months to a year. Once you get into the habit of owning your credit debt or lack thereof, then you can start accruing points and miles through credit card rewards and reaping the benefits soon after.

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2 Comments

  1. Adrienne August 28, 2015 at 8:54 pm

    First I must say what a lovely lady this letter comes from! Secondly, I’ve found that starting off slow is the way to go! i started with the Delta Skymiles Gold Card, as I was flying Delta a lot, have also had the AMEX SPG card and the Chase United Explorer card (as I have a ton of United miles and wanted to maximize). Lia- as Juan had suggested before, I would recommend getting started with the Chase Sapphire Preferred and also the Chase Freedom. Nice thing is in terms of keeping track, both cards are through Chase so when you login into your account it’s a one-stop-shop! You can also put automatic payments on them so you’ll never miss a payment (those $25 late fees are hefty). I have also ALWAYS paid my card off in full which has helped my credit score over the years! Great post Juan!

    • DD Daddy August 30, 2015 at 5:18 pm

      Thanks Adrienne. I agree, with the Freedom and CSP, you have 2 of the 3 trifecta power team of award earning cards by Chase.

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