How does acquiring and using multiple credit cards to achieve big mileage bonuses for travel affect your credit score? Surprisingly, not that much at all. In fact, we’ve heard from many Cards for Travel regulars that good management of numerous credit cards has actually increased their credit score!
Your credit situation is unique to your spending habits and history. The smartest thing you can do to manage your credit score well is to understand how a credit score is calculated and keep an eye on yours as you apply for new cards and cancel the ones you aren’t using.
In the U.S, the most important number that determines your credit viability is your FICO score. This number ranges anywhere between 300-850 and the higher it is, the better. The median score in the U.S. hovers around 723, and for most purposes if you’ve got a score above 700, your credit is in decent shape (anything above 800 is fabulous).
Contrary to popular logic, your credit score isn’t solely calculated on how much money you owe and if you’ve paid your bills on time. There are five factors used to calculate your FICO score:
How your FICO Score is Calculated
What do each of these mean?
Payment History (35%): Do you pay your bills on time? If you pay late, how late? How long has it been since you missed a payment? How many times have you had problems? The more responsible you’ve been, the higher your score.
Amounts Owed (30%): How much credit do you currently have? Of that credit, how much do you actually use?How many of your accounts have balances? The less of your available credit you use, the better your score.
Length of Credit History (15%): How long have your accounts been open? How long has it been since you used them? The longer you’ve had credit accounts, the better your score.
Types of Credit Used (10%): How many different types of credit accounts do you have? How many of each type do you have? Your FICO score will be higher if you’ve had a mix of different kinds of credit.
New Credit (10%): Have you opened new credit accounts recently? How many? Opening new accounts may drop your score a point or two, especially if you open multiple cards in a short period of time. (You can sometimes get around multiple credit inquiries for new cards if you apply for multiple cards in the same day rather than over a period of days).
It’s good to keep track of your credit score, and you can easily do so at www.myfico.com. If you’re active in applying for credit cards, we recommend having a look once a quarter, or minimally twice a year. There is a cost of $19.95 to get a FICO report, however recently Barclays has begun offering free FICO tracking as part of the standard bonus for several of their credit cards including U.S. Airways Mastercard, Lufthansa Miles & More, and the Arrival Plus Card. If you’re a cardholder in any of these (or other Barclay’s programs) it’s worth checking up on how to register.
Understanding these basics will help you be smart as you track your credit score. Most importantly, remember that lenders will be more inclined to give you money (ie. new credit cards) if you have a history of on-time payments and don’t seem to be overburdened with debt.
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Outside of the U.S.? While the FICO is specific to the U.S., similar credit scores exist in the U.K. and Canada and the same principles apply no matter where you live.
Image: Get Rich Slowly, Unconventional Guides
