S1E3: Myth: Opening credit cards will ruin your credit score

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<v Speaker 1>One of the biggest common sense myths when it comes to personal finance is that opening a lot of credit cards is inherently going to ruin your credit score.

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<v Speaker 1>It's a persistent myth because it seems logical, but it's just that.

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<v Speaker 1>It's a myth, and that's what we're going to talk about today.

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<v Speaker 1>Psychological, but it's just that.

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<v Speaker 1>It's a myth and that's what we're going to talk about today.

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<v Speaker 1>Not understanding how your credit score is calculated and how to keep it high prevents a lot of people from enjoying a lot of the benefits of travel points, as well as those free vacations that we're trying to get.

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<v Speaker 1>Welcome back to Travel Points for Normal People.

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<v Speaker 1>I'm Katie and I'm here because I know that travel costs add up, especially for a family, but I believe that travel isn't just for the rich.

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<v Speaker 1>That's why, on Points for Normal People, I share the tips and tricks that our family has been using for over a decade to help you use your everyday expenses and credit card welcome offers to supercharge your travel points so that you can pay for entire family vacations.

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<v Speaker 1>Every year, I have been opening credit cards your travel points so that you can pay for entire family vacations every year.

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<v Speaker 1>I have been opening credit cards for travel points regularly for over a decade.

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<v Speaker 1>So in this episode I'm going to really be transparent by showing my credit scores as well as my husband's credit scores.

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<v Speaker 1>I'll also share how many cards we've opened, so you have a sense of what we've done.

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<v Speaker 1>Then I'll go into specifics on how credit scores are calculated, as well as tips to keep your credit scores high.

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<v Speaker 1>First, let's do a very brief run-through of what your credit score is and why it matters.

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<v Speaker 1>Traditionally, credit scores were given on a scale of up to 850.

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<v Speaker 1>Now some are up to 950.

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<v Speaker 1>Banks and lenders and credit card companies use your credit score and accompanying credit reports to determine whether you're worthy of a loan or a credit card.

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<v Speaker 1>Companies use your credit score and accompanying credit reports to determine whether you're worthy of a loan or a credit card.

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<v Speaker 1>Your score can also affect the rates you qualify for with a loan like a car loan or a mortgage.

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<v Speaker 1>While it might seem nice to aim to have a perfect 850 credit score, this is one case where perfection doesn't matter.

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<v Speaker 1>Anything above 800 is considered excellent.

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<v Speaker 1>Any score between 740 and 799 is considered to be very good.

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<v Speaker 1>Within those top two ranges, you typically can qualify for the best rates for a mortgage or a car loan and ultimately, for most people, that's the main purpose of a good credit score to be able to get a good rate on a loan when you need or want one.

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<v Speaker 1>I think that most people understand that having a good credit score is a sign of good financial habits, and I think that most people know that credit card debt is a huge problem in our country.

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<v Speaker 1>And most people know that credit cards can cause people to overspend on their budget.

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<v Speaker 1>This is all true.

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<v Speaker 1>Most of the people that I've talked with that have a real fear of credit cards.

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<v Speaker 1>That fear was instilled in them by a person who was burned by credit cards, so I think that people start to equate those things.

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<v Speaker 1>Credit cards can cause big financial problems for people.

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<v Speaker 1>High credit scores are a sign of financial health.

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<v Speaker 1>Therefore, having lots of credit cards must seem risky to banks and must lower your credit score, but this isn't actually the case.

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<v Speaker 1>I'll show you first with my credit scores and then I'll explain why this is true and how FICO calculates scores.

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<v Speaker 1>If you are watching this on YouTube, I will overlay a screenshot so you can check my facts.

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<v Speaker 1>So I just pulled my credit scores this week on Credit Karma and it shows two different scores 818 and 829, for Equifax and TransUnion.

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<v Speaker 1>Both of those are in the excellent range.

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<v Speaker 1>Now Credit Karma uses a different scoring method called Vantage Score 3.0, and this can vary slightly from your FICO score, but overall, the bigger point here is that it's in the excellent range.

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<v Speaker 1>My husband, micah's credit scores are in a similar range.

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<v Speaker 1>His score for TransUnion is 800.

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<v Speaker 1>On Equifax, it's 820.

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<v Speaker 1>After over 10 years in this hobby, these are our scores.

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<v Speaker 1>And about how many cards have we opened?

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<v Speaker 1>I don't have a complete list all in one place, but the cards I've opened since 2016 are logged into Travel Freely, which is an app that I use to help me keep track of them.

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<v Speaker 1>Since 2016, my counters show that I have 34 new credit cards opened and my husband has 31.

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<v Speaker 1>So in total, we have 65 credit cards in the past eight years.

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<v Speaker 1>That's how many we've opened, and you can see the impact that it has had on our score, which is not very much at all.

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<v Speaker 1>So let's talk about how we manage that and how you can too, simply by understanding how your FICO score is calculated.

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<v Speaker 1>Once we understand that, we can take this knowledge of how scores are calculated and use it to make sure that we're keeping our scores high.

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<v Speaker 1>This is not a personal finance podcast.

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<v Speaker 1>I'm not here to teach you how to manage your expenses.

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<v Speaker 1>I'm assuming that you're already there with me, and if you're not, you have to get there before you do all of this.

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<v Speaker 1>So let's start off with the biggest impact to your credit score.

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<v Speaker 1>Fico has this really nice pie chart for us that shows us exactly what goes into calculating your credit score.

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<v Speaker 1>The biggest part of the graph is 35%.

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<v Speaker 1>35% of your credit score has to do with payment history, and that is great news because payment history is really easy to stay on top of.

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<v Speaker 1>Payment history means that you pay your bills on time every month.

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<v Speaker 1>That is why if you miss payments, especially if they go into delinquency, even if it's a small amount, it can have a huge negative impact on your credit score.

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<v Speaker 1>I will link in the show notes an article that my mom sent me that I found very interesting.

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<v Speaker 1>It's from the AARP website, about a journalist who intentionally tanked his credit card score because he wanted to see firsthand the impact depending on what he did.

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<v Speaker 1>One of his biggest takeaways was that just one delinquent payment, even of a small amount, made a huge negative impact that took years to recover from.

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<v Speaker 1>To stay on top of this biggest part of the pie, this 35%, you just need to make sure you're paying your bills on time.

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<v Speaker 1>Personally, the way that I manage that is I just put everything onto autopay.

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<v Speaker 1>That's part of what I do.

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<v Speaker 1>Every single time I get a new credit card, I make sure to put it on autopay.

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<v Speaker 1>Have I ever missed a payment?

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<v Speaker 1>Yes, I have, with 65 credit cards in the past eight years.

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<v Speaker 1>There have been times I've missed a first payment due on a card, but these missed payments didn't affect my credit score, because typically a bank won't report a missed payment as a delinquency for a few months, and so what I've done every single time that that's happened which has happened more than once is I call the bank and I literally just ask for forgiveness.

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<v Speaker 1>I say I'm really sorry, I forgot to set up auto pay.

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<v Speaker 1>This is a new card, can you waive the late fee?

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<v Speaker 1>And every single time they have told me yes.

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<v Speaker 1>I hope for your sake that it never happens to you.

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<v Speaker 1>But, like I've said, I'm a busy homeschool mom of two, so sometimes things fall through the cracks here.

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<v Speaker 1>Overall, setting up auto pay helps me make sure that I'm making these payments on time.

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<v Speaker 1>The next biggest part of this pie chart from FICO is amounts owed.

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<v Speaker 1>Amounts owed is 30% of your score, and this is something that a lot of people don't understand.

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<v Speaker 1>Another way to think about amounts owed and actually I think a more descriptive term is credit utilization.

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<v Speaker 1>Credit utilization is the amount of credit out there that you have been extended versus what you're using.

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<v Speaker 1>The good news is that for many people, as you open more credit cards, this part of your score actually gets stronger.

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<v Speaker 1>To keep the credit utilization part of your score high, which again is 30% of your score, you need to have credit extended to you which you are not actually using.

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<v Speaker 1>As we started opening more credit cards for points, we actually saw this part of our score increase because when we started, we were young enough that we hadn't had much credit extended to us in the past.

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<v Speaker 1>Now here I will emphasize that you should always be paying off your balance in full on credit cards.

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<v Speaker 1>Cards with travel points tend to have astronomical interest rates and if you are carrying a balance and paying interest, you are negating any value that you might get from those points.

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<v Speaker 1>But due to the fact that banks report account balances to credit bureaus on certain dates and your payment due date may be after that date.

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<v Speaker 1>Sometimes you will see a balance reported on your credit report.

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<v Speaker 1>Then it will be gone the next month.

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<v Speaker 1>So with that in mind, let's talk about credit utilization.

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<v Speaker 1>You can think of it like this let's say you have one credit card with a $10,000 credit limit and you have a $1,000 credit card bill reporting as a balance on your credit card.

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<v Speaker 1>You know you're going to pay this off, but on your report it looks like you're using 10% of your credit limit.

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<v Speaker 1>So that's 10% credit utilization.

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<v Speaker 1>Now let's say you get a few more credit cards and for really easy math here, let's say you get 10 cards and now you have a $100,000 total credit limit.

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<v Speaker 1>That same monthly bill of $1,000 shows up on your credit report because your monthly expenses haven't changed, but now your credit utilization is only 1%.

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<v Speaker 1>So that big part of the pie chart, that 30% for having low credit utilization, will be even stronger.

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<v Speaker 1>As a side note, it's important to keep in mind that with credit utilization, sometimes if you close a card that has a really big limit, you may see a negative impact to your score.

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<v Speaker 1>So a little tip here is that if you are closing a card that has a high credit card limit and you have other cards with that bank, you can often ask a bank to move some of the credit limit over to one of the cards that you're keeping.

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<v Speaker 1>With those first two areas payment history and credit utilization we've covered 65% of your score.

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<v Speaker 1>35% was payment history and 30% was credit utilization.

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<v Speaker 1>The next biggest part of the pie chart is 15% and that is for length of credit history.

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<v Speaker 1>This includes how long your credit accounts have been open, the age of your oldest account, the age of your newest account and an average age of all your accounts.

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<v Speaker 1>With opening a lot of new cards, this part of your score may see some impact.

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<v Speaker 1>There are two main ways to lessen that impact.

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<v Speaker 1>First of all, if at all possible, you want to keep your oldest cards open.

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<v Speaker 1>In my case, I have two really old cards that I opened really early on, right after college.

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<v Speaker 1>One of those is an American Express blue card, which I've had since 2006 and, honestly, rarely, rarely, use it, and the other is a Chase Freedom card, which is not even one of the current Chase cards offered.

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<v Speaker 1>It's just called a Chase Freedom.

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<v Speaker 1>It's not a Flex or an Unlimited, and both of those I plan to keep indefinitely because they are pulling up my average.

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<v Speaker 1>Keep in mind that even authorized user accounts can help this part of your score.

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<v Speaker 1>I used to have a card that my parents had added me to as an authorized user when I was in high school for emergency expenses, and that card carried all of its credit history onto my credit report.

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<v Speaker 1>So in my 20s I not only had a really good payment history record from that card their authorized user card I had an average length of credit history that was very high.

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<v Speaker 1>I had an account in my 20s that had a 20-year history.

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<v Speaker 1>This helped boost my average and boost my score.

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<v Speaker 1>A related tip you can use this to help boost someone else's score, like my parents did for me.

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<v Speaker 1>If you're a parent, you can add your child to one of your cards that you've had for a really long time and that can boost their credit history so that when they turn 18, they will have a higher credit score because they inherit the history of that card, including credit length and also payment history.

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<v Speaker 1>Some people do the same.

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<v Speaker 1>If they have a partner who may not have a really strong credit score, you could add them onto a card that you've had a long time with a really good payment history.

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<v Speaker 1>So, again, to keep this strong, you'll want to keep your oldest card open whenever possible.

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<v Speaker 1>You'll also want to minimize canceling cards.

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<v Speaker 1>Now, we do cancel some cards.

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<v Speaker 1>Of those 65 cards we've opened since 2016, we have canceled 24 of them.

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<v Speaker 1>So you can see it is still possible to cancel some cards and maintain a good credit score.

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<v Speaker 1>Again, this is a factor to consider.

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<v Speaker 1>Can see it is still possible to cancel some cards and maintain a good credit score.

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<v Speaker 1>Again, this is a factor to consider.

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<v Speaker 1>But ultimately, it is just 15% of your score and by keeping your oldest card open, that will also be helping your average.

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<v Speaker 1>Another great option to boost this part of your score while opening cards for travel points is to downgrade a card to a no annual fee version instead of canceling.

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<v Speaker 1>Since 2016, we have downgraded 15 cards instead of canceling them.

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<v Speaker 1>We have multiple Chase Freedom cards, for instance, because my husband and I have both gotten the Chase Sapphire Preferred card more than once, but we don't need to both be paying an annual fee of $95 on that card, so we really only need one.

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<v Speaker 1>So we downgraded one of our Sapphire cards to a Chase Freedom card, which has no annual fee.

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<v Speaker 1>A lot of banks have what they consider product families and within the product or card families, you can change from a card with an annual fee to a card with no annual fee.

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<v Speaker 1>Typically, your card number will stay the same and the account on your credit report will stay the same and it'll keep that longer credit history and payment history.

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<v Speaker 1>Again, you don't always have to do that.

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<v Speaker 1>I don't want you to keep a card with an annual fee that you're not using the benefits on.

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<v Speaker 1>Moving on, let's finish explaining this pie chart and then I'll go into a few more other details and tips To review.

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<v Speaker 1>We've covered 35%, which is payment history, 30%, which is credit utilization, 15%, which is average length of credit history, and all of that has added up to 80%.

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<v Speaker 1>The last two parts are both 10% of your score.

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<v Speaker 1>Each One of those is credit mix.

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<v Speaker 1>This is stronger when your credit report has more diversity.

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<v Speaker 1>So if you have had a mortgage and you have had an auto loan and you've had student loans and a credit card, then this area of your score will be stronger.

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<v Speaker 1>If you're a person who has never used credit cards, this could get better for you if you're finally starting to use a credit card because it adds to your credit mix, then the last 10% is impacted by new credit.

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<v Speaker 1>This is probably where you're going to see the biggest impact, but again, it is only 10% of your total score.

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<v Speaker 1>This largely has to do with new inquiries for credit on your report, so you will see a dip of a few points every time you apply for a new credit card because you're going to have what's called a hard inquiry into your credit report.

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<v Speaker 1>If you were to apply for a credit card every single day for a month, you would probably see a few points dip every single day and that's going to be harder to recover from.

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<v Speaker 1>But typically experts say that you'll recover those few points within a few months.

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<v Speaker 1>To help keep this part of your score stay strong, I generally recommend that you'll recover those few points within a few months.

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<v Speaker 1>To help keep this part of your score stay strong, I generally recommend that you wait 60 to 90 days between opening credit cards.

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<v Speaker 1>That gives your credit score that time to recover from those few points it has lost.

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<v Speaker 1>So now that you have a background knowledge of how your score is calculated, I'm going to give you a few key habits that will help you keep your credit score high while opening cards for travel points.

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<v Speaker 1>The first thing that I think is so important to do is monitor your credit.

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<v Speaker 1>If you're not already monitoring your credit, now is the time to start.

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<v Speaker 1>Some banks give you this option, like Chase has something called Chase Credit Journey that can do this for you.

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<v Speaker 1>I personally use Credit Karma, which is a free service.

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<v Speaker 1>There's other ways that you can monitor your credit as well that are free.

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<v Speaker 1>Whatever you use, it is important to sign up and also set up alerts so that you know anytime your credit report is accessed and you are alerted if any new accounts are opened in your name.

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<v Speaker 1>You have to know what's going on with your credit score and report and you have to keep tabs on it, both for yourself, but also in case of identity theft, which is unfortunately very common now.

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<v Speaker 1>As discussed before, every time you get a card, I also recommend that you set up auto pay.

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<v Speaker 1>Another key habit that we've discussed already is keeping your oldest card open so that you can keep that length of credit history strong.

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<v Speaker 1>We've also discussed trying to downgrade a card instead of canceling it when possible.

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<v Speaker 1>As a reminder, you don't have to do this every single time.

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<v Speaker 1>It's also good to space out your credit card applications because, like I said, that ties into the new credit part of the chart.

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<v Speaker 1>One last way to keep your credit score strong is by opening business cards.

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<v Speaker 1>We will talk about business cards in detail in future episodes, but I wanted to mention them briefly in this episode because business cards generally have a different impact to your credit score, which is a lower impact to your credit score.

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<v Speaker 1>Broadly speaking, for most banks and for business cards that I will be recommending, they don't show up on your credit score.

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<v Speaker 1>Broadly speaking, for most banks and for business cards that I will be recommending, they don't show up on your credit report.

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<v Speaker 1>What will show up is the hard inquiry.

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<v Speaker 1>So if you go to apply for a Chase Inc cash card, which is a business card from Chase, it will show up on your credit report that Chase has accessed your credit.

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<v Speaker 1>So that is a hard inquiry.

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<v Speaker 1>So it will show up in one very small part of your credit report the 10% accessed your credit.

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<v Speaker 1>So that is a hard inquiry.

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<v Speaker 1>So it will show up in one very small part of your credit report the 10% for new credit.

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<v Speaker 1>You will see it there, but the actual account does not go onto your credit report.

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<v Speaker 1>So that means that if you have that card and you close it after a year, it's not bringing down your average length of credit history.

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<v Speaker 1>Business cards can be really valuable beyond just a lowered impact to your credit score.

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<v Speaker 1>Of our cards, of those 65 cards, 33 are business cards, so it's more than half.

00:17:21.775 --> 00:17:25.180
<v Speaker 1>We'll go into business cards more in future episodes.

00:17:25.180 --> 00:17:35.936
<v Speaker 1>I hope that this overview of the factors that influence your score is helpful to give you an understanding of how you can open multiple cards and maintain a high credit score.

00:17:36.719 --> 00:17:39.371
<v Speaker 1>Your action steps today are simple as always.

00:17:39.371 --> 00:17:43.420
<v Speaker 1>First of all, sign up for something to monitor your credit.

00:17:43.420 --> 00:17:47.615
<v Speaker 1>I will put a few links down in the show notes if you need advice on where to go.

00:17:47.615 --> 00:17:54.617
<v Speaker 1>I didn't talk about this in the show, but I actually also recommend that you freeze your credit bureau reports as well.

00:17:54.617 --> 00:17:58.050
<v Speaker 1>There used to be a charge to do this, but now it's free to do.

00:17:58.050 --> 00:18:14.876
<v Speaker 1>I think it can be really helpful to just have the default be that your credit reports stay frozen, which means that no one can access your credit, which helps you prevent identity theft and, yes, it adds an extra step when you go to apply for cards, but it keeps you the safest.

00:18:14.876 --> 00:18:22.396
<v Speaker 1>So, in addition to monitoring your credit, I recommend you freeze your three main credit bureaus so that no one else can access them.

00:18:22.396 --> 00:18:30.034
<v Speaker 1>Thanks again for being here with me today, and I can't wait to see you next time, where we will continue unlocking the secrets of travel points together.