Having a good credit score and eating it too…wait…what?

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So it’s time for us to have that talk.  You know…the one about credit score.  Because everyone entering this hobby has that very valid question:

“Doesn’t this hobby keep you from having a good credit score?”

It’s an excellent question because your credit score is an important thing to monitor and care about.

So I’m going to try a slightly different approach to this post.  I’m going to talk first about which things in this hobby are good for your credit score, and then secondly about which things could arguably be seen as risky, as well as how we make sure to handle those risks.

 

How this hobby is good for your credit score

  • Having more GOOD accounts open is a good thing.  Think of it this way.  The more accounts you can point to to prove your trust-worthiness, the better.  If you’ve done well with one account (“well” being on-time payments and generally low-ish balances) then that’s good.  But if you’ve done well with multiple accounts, that’s even better.
  • Similarly, the more credit you’re trusted with, the better.  So a $5,000 credit limit here and a $3,000 credit limit there…those add up.  And that is a factor in your credit score.  Again, this is all dependent on the assumption that you are doing WELL with this amount of money.  (Again, “well” being on-time payments and generally low-ish balances.)

The risky bits that require some strategy:

  • Canceling cards can bring your score down.  Perhaps not for the reason you’d think.  It’s not that canceling a card is, in itself a bad thing but rather that your average length of account history is something that gets factored into calculating your credit score.  It’s kind of like being a long-term customer.  If you’ve done a good job with a line of credit for a long time, extra points for you.  So getting a lot of accounts that are only open for a year brings down that average length of history.What to do about it: For this reason, you should try to make sure you have a few no annual fee cards that you can keep around for ever and ever.  Like the Chase Freedom card for instance.  The logical thing would seem that you can cancel a card you don’t use anymore.  But in reality, if it’s a no annual fee card, you should keep it open even if you never use it again in your life.If the card you’d like to cancel has an annual fee that you’re not sure is worth the perks, call to see if the card can be downgraded to a card with a more manageable (or nonexistent) fee.  This isn’t always possible, but there are actually quite a few cards that can be downgraded.
  • Every time someone other than yourself is accessing your credit history, this is called a “hard pull.”  It’s different than when you check your credit score yourself simply to know what it is. (That’s a soft pull).  A hard pull implies that someone else needed to see your credit history to make a decision about your credit-worthiness.  For instance when you apply for a loan or credit card, etc.A hard pull may sound scary but it’s really just a little mark or notification on your score that could indicate desperation if there are too many of these hard pulls in a short amount of time.  These “marks” are gone within two years.  In my experience, my score may drop a few points.  Nothing major.  Having said this, we do try to space applications out a little bit (1-3 months).  Also, we avoid unnecessary hard-pulls.  For instance if you try to add an authorized user on a card, take note of whether or not the agent or application requests the other party’s social security number.  If this information is requested, chances are that person will receive a hard pull on their account.

Conclusion:

The conclusion is that this hobby with credit cards does not have to be risky.  But the question of whether or not it’s a risk for you has everything to do with your own ability to do well with credit.  Remember, doing “well” means making on-time payments and carrying only low-ish to no balance on your cards.  If you get these travel cards and then use them to excuse expenses you wouldn’t have otherwise, then  this hobby is risky for you and you’re …well…you’re losing.  I know a lot of people who get their first travel rewards card and say “Now I can go buy that thing I’ve been wanting.”

No.  That’s not the point.  Credit is not money.  It’s potential debt.  If having a travel rewards card was a good excuse for spending money, couldn’t you just spend the money on a plane ticket and bypass the need for that credit card?

Get the credit card.  Spend intentionally, but not more.  Get the bonus.  Fly.

10 Comments on “Having a good credit score and eating it too…wait…what?

  1. Very good point on adding the authorized user and the app asking for their ss#. Just realized this yesterday during a call with Barclays.

    • Ya, it’s definitely something to watch out for! This can also happen when transferring credit from one card to another.

      • I don’t believe that a card issuer can make a hard pull on an authorized user’s credit report because the issuer is not extending credit to the authorized user and because the card issuer does not receive the authorized user’s consent to do so (the primary user gives this consent for himself as part of the application process). Please let me know if you know otherwise!

  2. My feeling is that you are probably right. It does seem odd to hard pull someone’s credit without permission from that person, but some agents have implied that it’s a possibility. (Now, this could’ve just been because they weren’t sure, but who knows.) And also, I’m just not sure why they need the SS# otherwise.

    • I believe the SSN is used to concretely link the account to an authorized user’s credit report(s). Without it, the credit reporting bureaus just do their best to make the connection (for example by shared address). This is seen when I add my wife as an authorized user on my account. Regardless of whether the issuer asks for a SSN, typically the account shows up on her credit report as an authorized account, but having her SSN would sure make that a lot easier for them.

  3. Is the formula for determining your credit score a known thing? One item I am interested to know more about is credit utilization rate and if that affects your score. Wondering about both high and low utilization (low as in not using a card at all)

    • I don’t think there’s any kind of publicized formula per se, but there are a lot of resources out there for learning what tends to be valued. As for the item you’re curious about, credit karma does say this:

      “Experts recommend keeping your credit card utilization below 30 percent on each card and collectively.”

      I have heard others say even lower: more like 15 percent but I don’t remember where I heard that number. The idea is to spend on the card, but not more than what you can pay off each month.

      Hope that helps!

      • Thanks for the info Carrie that does address my question. However I have a further question – can you please reconcile your comment that “The idea is to spend on the card, but not more than what you can pay off each month.” and the part of your post that says “The logical thing would seem that you can cancel a card you don’t use anymore. But in reality, if it’s a no annual fee card, you should keep it open even if you never use it again in your life.” Is there harm done by having a card you rarely or never use?

        • Great question. Here’s what I mean. Obviously spending a bit on your cards and then paying them off at the end of the month is technically best (mostly in terms of maintaining a good relationship with the banks). But it’s unrealistic for those of us who are going to get dozens and dozens of cards for the points. Some of those cards we’ll just have to cancel because we don’t want to be paying loads of annual fees. But the ones that don’t have annual fees, (or can be downgraded to no annual fee cards), keeping it open even if it’s unused outweighs canceling it. Remember that your average length of history is factored into your credit score. In this case, the benefit of keeping a card open and thus keeping your average length of history as lengthy as possible, outweighs the slight negative side of having a card that shows no use.

          The shorter response is this: Knowing that you won’t realistically be able to spend and pay off 0-30% on each and every one of your many cards, keeping a card you don’t use will be better for your credit score than canceling a card you don’t use, (granted there’s no annual fee.)

          And ultimately, none of us really know the exact algorithms. But the general rule of thumb is that older accounts are better than young accounts, and lower credit usage is better than higher credit usage. So don’t worry about making spends on a card just for the sake of showing use, unless your credit is poor and you’re just getting one or two cards solely to build your credit.

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