Credit Cards and Credit Scores... so freakin' confusing

[Rivanariko]

I just bought the Master Frequent Flyer book thing that Steve recommended that helped him rack up all of his miles for his epic world adventures. I'm ridiculously excited because I LOVE to travel and I'm pretty good at living on nothing once I'm there but planes are crazy expensive to ride in. So when I saw the guide, I did a gigantic dance of happiness and bought it.

The biggest way that the guide suggests for racking up miles is through credit card offers and purchases. I'm worried, however, as to how that would overall affect my credit score, something which I am very protective over (My Precious...). I have a credit card currently which I am very very careful with and pay off the balance in full every month. I don't default on payments and while I did carry a balance for a while thanks to a very unfortunate financial situation, I'm out of that and back on the "credit card is for convenience, not for spending money I don't have" camp.

I've read/been told somewhere that having multiple credit cards can have a negative affect on your credit score, and that having a very high available balance makes you a higher risk for a potential loan (not that I'm looking for a loan right now, but if we get to move where we want to in the next few years, we'll be looking to buy a house) because you COULD potentially max them all out and then go "OMG I HAVE NO MONEY!". Which I would not do. I want to get these other credit cards for the mileage deals, and then use them for things that get me more miles and promptly pay them off like the responsible little creature that I am. I was planning on keeping my current credit card (which does not give me miles, loser card) because I've had it for a while and I've heard that closing your oldest card is bad for your score, but I've ALSO heard that it's not good to have cards that constantly have a zero balance on them. I don't know why any of this is because I don't get the credit industry. At all. Which is probably obvious.

IS ANY OF THIS TRUE?

TL;DR - I want to start travel hacking, but I'm concerned about the affects of credit card offers on my credit score.

[Zorch]

It's debatable. I recently took out a loan on a new car since I qualified for one of those really low promotional rates - my credit score actually went *up* the following months, but when I pulled a free credit report, it claimed that my credit score was being hurt by carrying multiple accounts with balances(even though I typically pay my credit card in full every month). I should note though, that I had a couple late payments back when I was an irresponsible college student, and it could have been one of those rolling off my credit history that was responsible for the increase in score.

I'm not really convinced that the extra card hurts you as much as carrying a large balance. I've heard that the fraction of your available credit that you're currently utilizing is a pretty large factor in your credit score.

For reference, I basically carry one personal credit card with a fairly high limit but no rewards as well as a corporate AMEX card(used only for business travel). I've frequently contemplated getting another awards-based card for the points and as a backup card. I wouldn't expect it to hurt me much - but as I might be in the market for a house in the near future, I'm likely to settle on a mortgage before I do anything that might affect my rate.

[chasely]

Every time you have a hard inquiry on your credit accounts (meaning that you apply for credit), your score will typically be lowered 2-5 points from that inquiry for 2 years. If you get approved for the card, the new card will decrease the age of your accounts, which will have a small negative effect on your score. Getting the card will also decrease your utilization limit because you have more available credit, assuming that your spending habits don't change. A lower credit utilization leads to a highe credit score.

Overall, it's pretty much a wash. In my personal experience, I've received four airline credit cards in the last 16 months (three of which are now closed), and my credit score is essentially where it was when it started.

The general rule is, if you are going to apply for credit in the next two years for something where a higher credit score can lead to a lower interest rate on a large principal (i.e. a mortgage), wait to apply for the credit.

As of right now I have four credit cards: two older cards with low limits that I rarely use (1-2 times a year to keep them active) to help the "age" of my credit, an REI Visa card that I've had for a while that I charge recurring expenses that I can't change online (mainly my insurance), and right now a Chase Sapphire Preferred card that I used for the signup bonus.

Unless a great airline deal comes around (like the American Airlines 75,000 bonus miles or British Airways 100,000 bonus miles offers), I'll just be looking for hotel cards the next few months. If I don't have a good reason to charge to a rewards card (i.e. no bonus in play), then I generally will just switch back to my ING online checking debit card.

The system may seem complicated, but it's really quite simple. Let me know if you have any questions.

[Rivanariko]

Okay, so applying for new credit DOES have a negative affect, but it is minuscule, so as long as I'm not applying for 60 new cards, it shouldn't have too much of an affect, correct? The utilization limit is what confuses me. I've read what you said, about how having the amount of credit that you use being only a very small fraction of your total available credit is good for your score, because it shows that you're responsible with your credit, but I've also heard that it makes you a higher risk because you could potentially go insane and max them out and then not be able to pay any of your debts. Where is the balance there? Do you have to have the higher available credit for a while and prove yourself responsible? My current card has a high limit, which I like in that "just in case" scenario.

My credit isn't perfect, which is part of why I want to be so careful with it now. I missed a loan payment last summer when we were homeless for a few weeks.... so I'm trying to make up for that and see if I can nurse my score back to health. My goal is to be debt-free by the time we move, but we'll see how that pans out.

[67alecto]

Every time you have a hard inquiry on your credit accounts (meaning that you apply for credit), your score will typically be lowered 2-5 points from that inquiry for 2 years.

I'll jump in here, as the rest was generally correct. A hard inquiry - that is, an actual full request for a credit review, will only lower your score for a couple of months, not 2 years. The advice about not getting any hard inquiries prior to a big, credit-based purchase is good, but really depends on your overall credit.

From personal experience, I bought two new cars in the 9 months leading up the purchase of our current house. It had no effect on my APR or ability to buy a house. The reason is that my wife and I each have a credit score of just over 800.

Hard inquiries lower your score because they are basically viewed as potential debt. As is having a lot of cards with high limits. Even if the balance is low or zero, if you have too many, it will affect you negatively.

You basically want to walk the line between credit age and credit utilization in relation to your income.

I was planning on keeping my current credit card (which does not give me miles, loser card) because I've had it for a while and I've heard that closing your oldest card is bad for your score, but I've ALSO heard that it's not good to have cards that constantly have a zero balance on them. I don't know why any of this is because I don't get the credit industry. At all. Which is probably obvious.

IS ANY OF THIS TRUE?

TL;DR - I want to start travel hacking, but I'm concerned about the affects of credit card offers on my credit score.

Who is your credit card issuer? As long as it is not a mom and pop operation where the phone lines are answered by "Peggy", chances are they have various partnerships that you can convert your card to.

For example, Chase offers their ubiquitous Freedom/Ultimate Rewards card. But they also offer the United Airlines card as well as one for Southwest. You can call them up and see if you can convert your card to that other product. The benefit is that you keep the credit history and account age. The downside is that you won't qualify for the typical bonuses they offer to new customers.

Citibank has American Airlines, American Express has Delta, and so on.

What Steve talks about in his travel hacking guide requires discipline and attention to detail. A couple of lapses on your part could completely undo any savings or rewards.

[Ryan Sannar]

Posting to follow.

[Strawberry Squatcake]

I'll jump in here to restate stuff or explain further. But I may not be adding anything of use.

1. 67alecto is right. Having a bunch of hard pulls (pulls that you approve - not the soft pulls companies do to re-verify your credit or to send promo offers) can be a sign that you're applying for a bunch of debt simultaneously. So say I know my credit score is really high and I know I can get approved. I can apply for fifty-six credit cards (or approximately the number of offers in my mailbox at any one time) simultaneously. If all of those are approved I suddenly go from a measly $10K available to $200K. And then I advance all of it at once. At 39.7% interest. I'll be in trouble. So having your credit pulled a bunch can affect you. But having a couple of pulls in severa months shouldn't.

2. The available credit ratio is one thing that's considered. If you have a lot available for long-term and never come near that, you are responsible. If you get too much available, it can affect you because of the scenario listed above. But chances are if you carry that amount long-term it won't affect you. If you have six cards and each have a minimal balance and you decide you want to get down to one card. Closing the other five and taking your used versus available to 80% instead of 10% allegedly affects you. For example, say you have six cards, with $35K total available. $3.5K advanced. You have 10% of your available credit advanced. If you close off all but one card, with a $5K balance, you suddenly have much less credit available to you. ALLEGEDLY this affects you. However, I feel like telling consumers that is a scam banks and credit bureaus pull to keep more credit open/available. I work at a bank, and I would commonly tell people "This COULD affect you short term. But if you close those five cards and can maintain at or below where you already are in debt, it won't hurt you significantly."

3. Don't go doing anything crazy right before making a major purchase. Credit bureaus track you over time. And if you do a bunch of crazy stuff in March then have your credit pulled in May for your first house purchase, your score might be temporarily affected.

4. NO ONE knows how scores are calculated. Or at least every techy person I've talked to at each of the bureaus says it's such a convoluted equation, there's no way you could ever calculate it yourself. Every single time you pull it, your score will be slightly different.

5. I HAVE seen fines from small things like libraries on credit bureaus. Medical stuff will impact your score, but some FIs will ignore a score decrease if it's medical related, especially if payment arrangements have been made. Constant slow payments (consistently past due but not an unpaid loan) affects you more than people think. Loans are reported late at 30,60 and 90 days. So you CAN use your grace period without any worries. And in most cases, incur late charges without much of an impact. Just don't go over the 30 day mark.

6. Any losses impact you heavily. If you've let a negative account sit, do what you can to pay it off. I've seen people impacted because of an account they let go negative 3 years ago for less than $50. Just pay it off. Call the FI. And mail them a check. Most FIs wouldn't laugh at you if you paid it off $5 a weeek. Or month.

7. Fraud is a big impact, and one of the worst ones. If you're affected by fraud, do everything you can to clean up the mess. Get things that aren't yours completely off of your record. Don't just close them out, get the entire account removed from your name. This will require police reports and a LOT of time on the phone. But time well spent. Close out credit cards you don't use, or be diligent at looking at bills or checking activity online every month. I personally closed out my extra cards to avoid fraud, and take the short-term hit in my much smaller available credit. If you have a revolving loan (like for furniture or a TV or something similar) mail the last payment and on the check note "final payment - close account" and include a short letter instructing them to close out the revolving account. If you're not going to use it, close it. Limit your risk.

Sorry for the long reply! I used to work in a call center (and now work in IT) for a credit union. We spent a lot of time answering credit bureau questions. I have no idea why it's cloaked in such confusion, but I think that's how the bureaus like it.

[Rivanariko]

Thank you for the long post! That explains... some things. I wish that there were straight-forward answers to things like this, I don't understand why it has to be so complicated and confusing!

[msuroo]

Thank you for the long post! That explains... some things. I wish that there were straight-forward answers to things like this, I don't understand why it has to be so complicated and confusing!

Like most things - the bare essentials will get you 80% of the way. Pay your bills on time and don't overextend yourself. Your credit score will be fine.

If you have good credit and want to game a few bonus offers - by all means, go for it. (I just signed up for a Venture card myself - I have no intention of using it after the initial spend requirement, but I can't say no to a free thousand dollars.) Will that negatively affect my credit when added to the 3 other cards I carry - sure, but my credit score is already very good, and I'm not looking to finance a major purchase anytime soon, so it's worth it to me.

[Strawberry Squatcake]

Thank you for the long post! That explains... some things. I wish that there were straight-forward answers to things like this, I don't understand why it has to be so complicated and confusing!

Honestly? I think it's so complex and confusing so they can't be sued for discrimination. If it's vague, and always a moving target, it's hard to pinpoint what needs to be different.

[Philociraptor]

Two words: manual underwriting. Credit score is only a guide for big purchases, but most companies will pull your actual report if you ask. When they see that it's clear and you make enough money, you'll suddenly qualify for their lowest rate. Bought a car last year (at 21 years old) and got the 1.9% promotional rate thanks to a clear report and a new, decent paying job.

[Rivanariko]

Two words: manual underwriting. Credit score is only a guide for big purchases, but most companies will pull your actual report if you ask. When they see that it's clear and you make enough money, you'll suddenly qualify for their lowest rate. Bought a car last year (at 21 years old) and got the 1.9% promotional rate thanks to a clear report and a new, decent paying job.

Oh, excellent! That's a good one to know! Thank you!

[cracked_belle]

...I think my brain just exploded. I'm not sure I really comprehended most of that. X_x

[Strawberry Squatcake]

...I think my brain just exploded. I'm not sure I really comprehended most of that. X_x

Bottom line:

1. Pay your bills on time.

2. If you haven't always paid on time, pay off collections (and get a letter of proof when they're paid).

The rest usually takes care of itself. The other details are minor.

How's that?

[wildross]

I'll jump in here to restate stuff or explain further. But I may not be adding anything of use.

4. NO ONE knows how scores are calculated. Or at least every techy person I've talked to at each of the bureaus says it's such a convoluted equation, there's no way you could ever calculate it yourself. Every single time you pull it, your score will be slightly different.

I believe it is also proprietary to Fair Issaac (the company behind the credit scores). So even those who know, can't say.