Does Applying for Credit Cards Hurt My Credit?

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Many, but not all, of our tips include strategically applying for a credit card that offers a ‘miles bonus’.  Many people are concerned about how this sort of thing will effect their credit.  The results may surprise you, as they did me.  The very biggest bit of knowledge you should obtain when you are applying for credit cards to get awards bonuses is how it will effect your credit now, and in the future.  I have applied for many cards in a short amount of time, and both my wife and I have scores that are increasing!

Hand with Credit CardNOTE: This strategy of gaining free travel that I write about should only be considered if you can adhere to the following: 1. Paying your bills on time. 2. Paying your credit cards off. 3. You should be financially stable.  It is very important that you remain fiscally responsible throughout your venture into travel rewards!  If you are just barely making it by financially, or don’t have the discipline to pay off your credit cards, this is not something you should be getting into!  In addition, if you plan to apply for a car loan or mortgage in the near future, I would recommend you wait until after those have been completed before applying for any credit cards.

I went many, many years thinking I was doing the right thing to have the best credit score – paying my bills on time, keeping a low amount of credit lines open, not letting my credit card bills get too big, and making sure that nobody pulled my credit unless I was 100% ready to apply for credit (think car dealerships).  As it turns out, I was partially right.  I had maintained a credit score right at about 800 for well over a decade.  I had 2 credit cards, I had 1 mortgage, and I was paying loans on 2 cars (between the wife and I).  I have recently decided to play the ‘travel hacking’ game and watched my credit score very closely along the way.

Your credit score will take a small hit of about 5 points for each credit card you apply for, but this hit is temporary – and I will explain why later in this article.

I started hard (well, hard for me), and applied for about 5-6 different awards bearing credit cards within 2 months, and my wife also applied for a few accounts at the end of 2014.  Each card had a ‘spend’ to meet in the first few months to get the bonus points (which were substantial).  We applied for our cards before Christmas, when we knew we were putting a lot of spending on credit cards.  Earlier in the year, we may have taken it slower.  But now we are on a regimen of always spending toward a credit card bonus!

FICO Score GraphTwo of our credit cards provide actual FICO® scores as a benefit of owning the card.  This FICO® score is updated on a monthly basis. You can see the first few months of how our first plunge into applying for credit cards went.  The FICO® score for my wife is in the image to the right.

Notice how her credit score took a large drop in December?  That is attributable to 2 main things:

  1. She applied for 4 award credit cards in rapid succession (drop of 9-20 points), and
  2. we put a high spend on these cards, which utilized a high amount of her available credit.

Both of these together made her drop, because both are a part of how your score is determined.  But the decline in score was very temporary, and it is now ABOVE where she started.  This makes total sense now that I understand how credit scores are derived.  Below you will see why it is now higher because she applied for all of these cards!

Before I get started on how they work, you need to know that there are 3 main credit bureaus: TransUnion, Experian, and Equfax.  Each of these bureaus track your credit activity over your lifetime.  When you apply for credit, or miss a bill payment, your lender provides this information to one or more of these credit bureaus.  Each of those companies provide a “credit score”, where they try to approximate your credit worthiness based on the credit info they have on you. But this score is NOT the score that lenders get when you apply for credit!  In fact, this score should only be used by you as an approximation of your actual credit worthiness, and not your actual credit score!

When most people speak of ‘credit score’, they are almost exclusively speaking of your FICO® score.  Yet another company comes into the game here: Fair Isaac.  Fair Isaac is a separate company takes your credit info from each of the bureaus, and compiles it into 3 proprietary scores.  This is the de-facto score that lenders use to gauge your credit worthiness.  You have 3 FICO® scores, one for each bureau.  When lenders pull your credit score, they get your FICO® score(s) from Fair Isaac, not the credit bureaus.  Each of the credit bureaus has attempted to approximate FICO®, and they give this information out on their own credit ‘monitoring’ websites (CreditKarma, CreditSesame, etc.).  The main thing to take from this is if you see your ‘credit score’, then it isn’t the actual score that lenders use unless you see that it is your FICO® score.  Confused?  Try not to let it bother you too much.  Just a piece of information to keep in mind.

So how is your FICO® score determined?  Exactly how it is calculated has always been a secret known only to Fair Isaac, but in more recent times we have been afforded more guidance on how it is determined.  There are 5 key factors that determine your credit score:

  1. Payment history (35%)
    • This includes information on your credit cards, retail accounts, loans, and financing accounts.  It also accounts for bankruptcies, foreclosures, lawsuits, leins, wage garnishments, and judgments.
  2. Amounts owed (30%)
    • This includes amounts owed on all kinds of accounts, including the number of account that hold a balance, how much of the credit line is being utilized, how much is owed on installment loads vs the original amount of the loan.
  3. Length of credit history (15%)
    • This takes into account the age of each of your accounts, averaged together; as well as, the age of specific credit accounts and the time is has been since you have used certain accounts.
  4. New credit (10%)
    • This accounts for how many new accounts you have opened, how long it has been since you opened an account, how many recent requests for credit to the credit reporting agencies (ie. hard credit pulls), time since credit inquiries have been made lenders, and accounts for recent credit history vs past credit problems.
  5. Types of credit (10%)
    • Diversity of the credit accounts you have (credit cards vs installment loans), and how many of each you have.

So it is generally accepted among those who apply for a large amount of credit cards that most people will experience a short-term drop, followed by an increase in FICO® score.  For my wife, this has shown to be true.

FICO Score GraphAccording to most, the reason for the initial drop is:

  1. The initial hard pull to your account (New credit: 10%), and if applicable multiple pulls in a short amount of time.
  2. The lowering of the average age of accounts (Length of credit history: 15%).  You now have a brand new card, which lowers the average age of your accounts.

But, the reason it rebounds is because:

  1. Now you have a higher credit line, thus lowering your utilization of credit extended (Amounts owed 30%).  Think of it as you had 1 card with a $300 of 3K limit used, or 10 percent of your total credit line being utilized.  With the new card (assume another 3k), you now have 6k, but still have $300 outstanding.  You have now halved your utilization down to 5 percent.  This is a good move and weighs heavily toward your overall score.
  2. Now you have shown that you have 2 credit cards, increasing your diversity (Types of credit 10%).

Something that I have currently have left out is my graph of credit rating.  I started with a higher FICO® score then my wife (834).  I have gotten a few more cards then her, because I also apply for business cards for my business.  My score dropped down to 811, but then has not been reported on again, so my graph hasn’t been updated in months.  I expect it has recovered because my other source for FICO® has shown me that I am higher then when I started:

FICO Score

Again, I must stress that my wife and I are extremely financially responsible.  We only recently decided to check out credit cards that offer award bonuses.  We pay off our credit cards in full every month.  We offer these ideas for people with similar circumstances.  This type of activity is not for people who who are struggling financially, or do not have the discipline to make sound fina[/fusion_builder_column]ncial and credit decisions.[/fusion_builder_row]ave the discipline to make sound financial and credit decisions.[/fusion_builder_row][/fusion_builder_container]

By | 2017-05-18T12:46:51+00:00 March 10th, 2015|The Basics|0 Comments

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