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People are always amazed when they find out how much money my family saves on travel. We flew to Hawaii for $56, traveled to New York City for $22, and saved a ton of money on our trip to Disney World. We even got a free hotel room in Indianapolis when we traveled down there to run the Monumental Marathon last weekend.
However, when I tell people that we do this with the help of travel credit cards, they always have the exact same question:
Doesn’t opening credit cards hurt your credit score?
The quick answer to this question is that opening credit cards does NOT hurt your credit score.
However, this answer is probably not satisfactory to most people. This is because most people have heard that your credit score will be lowered whenever a credit card is open.
So let’s take a look at how your credit score is calculated. Then, we can talk about why it won’t be hurt by opening a new credit card.
Are you thinking of opening up a new card now? The Capital One Venture Rewards Credit Card currently offers 50,000 in bonus points just for spending $3,000 on this card within the first 3 months of card membership. It also offers 2X miles on every purchase made. Find out more about this card by clicking here.
How a credit score is calculated
Although the creators of the most popular credit score (the FICO score) do not tell exactly how they calculate your credit score, they do share that it is broken down into 5 different categories.
- Payment History (35%)
- Amounts Owed (30%)
- Length of Credit History (15%)
- Credit Mix (10%)
- New Credit (10%)
Payment History (35%)
The main thing the creators of the FICO score look at is payment history. In other words, have you historically paid your bills on time?
Getting a new credit card and paying it on time can actually help your payment history and therefore help your credit score. I try to pay my credit card weekly instead of monthly just to make sure that the payment is never late and that I am always able to pay my card in full.
Amounts Owed (30%)
The creators of the FICO score also weigh the amount that you owe fairly high. They are mainly looking at your credit utilization ratio, or the percentage of your available credit that you actually use.
For instance, let’s say that you had one credit card with $1,000 available to borrow on it. If you borrowed $500 on this credit card, then you would have a credit utilization ratio of 50%. However, if you borrowed $500 on a credit card with $5,000 in availability, then you would only have a credit utilization ratio of 10%.
This shows that getting another credit card can actually help your credit score, as long as you don’t borrow any more than you are borrowing now.
Length of Credit History (15%)
This is an area of the FICO score that is hurt by opening new credit cards.
To help offset this, I keep a credit card that I opened in college even though I do not use it too often. You may want to do something similar. Instead of closing an older credit card that you don’t use, just keep it open. This will not cost you any money as long as this older card doesn’t have an annual fee.
Credit Mix (10%)
Having a variety of types of accounts will help your credit score. This means that having a mortgage, a credit card, and an installment loan like a car loan can help your score.
Of course, if you don’t have a car loan, this doesn’t mean that you should run out and buy a new car, just to help your credit score. However, this does mean that only having credit cards will slightly hurt your credit score. My wife and I will probably see this part of our credit score hurt in a couple of years when we pay our mortgage off (since we don’t do car loans).
New Credit (10%)
This is obviously the part of your credit score that is affected the most by opening a new credit card. Keep in mind that this is only 10% of your credit score.
Usually opening a credit card will immediately lower your credit score by 3-5 points. However, in the long run, opening a credit card typically ends up helping your credit score.
Anecdotal evidence
Again, the creators of the FICO score do not publish the exact formula for calculating your credit score. Therefore, it is impossible to determine exactly how opening a credit card will impact your score.
However, there is a lot of anecdotal evidence to show that opening credit cards will not negatively impact your score.
- One blogger who has 15 travel credit cards saw his credit score increase from ~750 to 835.
- Ethan (who I read about on a credit card forum) saw his score remain steady at around 780.
- Ayesha saw her score increase slightly, from 802 to 805.
My evidence
When I first started opening credit cards to obtain travel rewards, I didn’t really care about my credit score. I wasn’t planning to borrow for car purchases or another home purchase, so I kind of thought that the score didn’t matter.
I just wanted to score some free travel!
Even though I didn’t care about my credit score, I did notice that my FICO score was 814.
Now, a few years later, I have scored $30,000+ in free travel. I also have opened up dozens of credit cards.
And my score …
As you can see, it is possible to get thousands of dollars in free travel, without having to worry about your credit score!
Skepticism
Keep in mind that I may get a commission if you go to my partner’s website and open up a credit card. So obviously, take everything that I say with a grain of salt. If you are going to open a credit card for the travel rewards, be sure to do your research first and start small.
A good place to start is with the Chase Sapphire Preferred card (this was my first travel card).
This card offers a bonus of 60,000 points after spending $4,000 on purchases within the first 3 months of account opening. The best thing about these “Ultimate Reward” points is that they transfer to a variety of travel partners. For instance, we are planning to transfer our points to United Airlines and use them to travel to Europe in 2 years.
More free travel? Sounds good to me!
Have you signed up for some credit cards? How has it impacted your credit score? Let us know in the comments below.
And thanks for reading!
~Nathan
Let’s keep living a great life … with the help of money. So what’s next?
- You can travel for free by using rewards credit cards.
- You can get motivated and get out of debt.
- You can check out the next post or the previous post and continue to learn.
But no matter what you decide to do, let’s leave the ordinary behind and take action today!
