Traveling On Your Credit Score
The common response when I mention the cards I am applying for and my travel game plan is usually a shocked open mouth followed by “that’s not smart.” The outside consensus is that this will greatly affect my credit score. I initially shared that viewpoint, and wasn’t planning on signing up for many cards. But the more I read on the process, the more information seems to support a different view. Credit card churning – or the process of applying for multiple cards in order to receive sign-up bonuses can in some cases even help your score!
If you don’t believe me, that’s fine. I’m still waiting to see the evidence on my credit score. If you are skeptical, wait and watch as this blog proceeds. But evidence from other blogs suggests the same, and it is working for me so far. And also, as I am based in the United States, this will apply to U.S. credit scores. I have no knowledge of the systems elsewhere. But here are some things you may want to know…
WARNING: If you do not have excellent credit, or plan to refinance or apply for a loan in the near future I highly recommend NOT messing with your credit! I am lucky in that my mother helped me build my credit at a young age and I now have excellent credit. I have also already used my credit for the things I need it for, such as my mortgage and car loan. Therefore I am willing to risk a credit score hit. If your credit score is not great, PLEASE fix it before attempting to apply for more cards. The best sign-up bonuses are available only to those with excellent credit. And a second point, do not apply for cards if you cannot responsibly handle the availability of credit or minimum spends. If you spend what the trip would have cost you are getting no benefit from the sign-up bonuses! If you pay interest you will even lose money! As with most things in life, this is all AT YOUR OWN RISK. Mileage may vary!
Let’s look at how applying for cards affects your score. A good resource is myfico.com’s “What’s In Your Score“. The main credit score factors that apply to credit card churning are having hard inquiries on your credit (opening lots of accounts represents a risk), utilization (what percentage of your available credit are you using?) and age of accounts (how long you keep accounts open). The largest portion of your FICO score is “payment history” at 35%. It is therefore important to always make your payments on time. The next highest impact category is “amounts owed”, at 30%. This is where credit card churning could actually help when done responsibly! If you do not increase your spending, but have more credit available your overall utilization will decrease and therefore help. Using high percentages of your available credit represents risk. At 15%, the next category is age of accounts, or “length of history”. Opening multiple accounts and then frequently closing them will impact your credit score. But this is only 15%, and there are several no-fee cards or ways to retain fee-based cards that are worthwhile. “Types of credit in use” accounts for 10% of your score, and lastly “new credit” is the final 10%. This last cateogry represents where inquiries affect your score. According to myfico.com ” For most people, one additional credit inquiry will take less than five points off their FICO score.” These inquiries will remain on your credit report for two years, although they will not affect your score past the first year. Frugal Travel Guy (link in Helpful Resources) is a wonderful blogger who churns every 91 days, and writes here about his “Card Churning Schedule“. Different card providers also request inquiries from different bureaus, allowing you to mix where your inquiries show up between Experian, Equifax and Transunion.
I also highly recommend you monitor your own credit. I personally use two free credit monitoring options, Credit Karma and Credit Sesame (NOTE: the Credit Sesame link is a personal link I benefit from if you sign up). While these services will monitor your credit and provide you with a score, keep in mind that it is not your true credit score, but rather an estimation. Credit Sesame uses Experian and provides its “National Equivalency Score”. Credit Karma uses TransUnion’s “TransRisk New Account Score, VantageScore, and Auto Insurance Risk Score”, and also has a decent iPhone app. Both are useful for quick estimates of your FICO score, but will try to suggest cards or loans. I suggest you further research anything you find. To see your actual FICO score, you usually have to pay. The site myFICO offers a free 10 day score watch trial, but you are only eligible once.
In the upcoming week I plan to apply for my next round of cards and will let you know how it impacts my credit.