I want to tell everyone who will listen to the tremendous value they can get by maximizing credit cards and using them responsibly. There are so many great credit cards out there, and those who use debit cards or pay cash are basically throwing money out the window (assuming they can use credit cards responsibly and don’t rely on credit card funding other than a 0% intro APR offer) .
When I talk to a skeptic about credit cards, I hear one more misunderstanding than any other – “But I’ve heard that applying for credit cards is bad for your credit score.”
Is that true? I currently have over 25 credit cards and my credit rating is excellent. Let’s see how that is possible.
How your credit score is calculated
Your creditworthiness is made up of the following components:
- 35% of your score is your payment history (the percentage of payments you made on time).
- 30% of your score is your credit use (how much credit you use compared to your total limits)
- 15% of your score is your credit age (the average age of your open accounts)
- 10% of your score is the types of loans you are using (how many different types of loan applications you have)
- 10% of your score is your requests for new credit (how often you applied for credit)
When you make your payments on time, you shouldn’t be using too much of your balance and your average account age should be pretty old, which is right there 80% of your credit score.
How Your Credit Score Goes Down When You Apply For Credit Cards
When you apply for a new credit card, your credit will usually be heavily charged. While the exact effects will vary from person to person, your request will usually result in a score of 2-3 points. That will drop your credit score within 24 months. The maximum credit score is 850, so a 2-3 point drop is almost nothing. Sometimes the drop can be more, but it generally recovers pretty quickly.
However, this is the only consistent downside to applying for cards.
The other possible downside (although it doesn’t have to be a downside) is that your average age of the accounts is part of your creditworthiness. For example, suppose you had only one credit card for 10 years and suddenly apply for a new card. Your average account age is between 10 and five years. To prevent this from becoming a problem, some credit cards need to be left open for a long time.
Ideally, hold onto the first credit cards you opened forever even if you downgrade the card to a no-annual fee product, as maintaining that credit rating is beneficial.
There are many cards that are worth holding, including no annual fee cards
How your credit score goes up when you apply for credit cards
The above covers the limited disadvantages of applying for credit cards. A request could temporarily lower your score. However, when you open up new credit cards, you can see tremendous positive improvements in your credit score.
The most basic reason for this is that you have a lot more credit available. The percentage of credit you use and your ability to make these payments on time will account for 65% of your score.
For example, let’s say you currently have a credit card with a credit limit of $ 5,000 and are spending $ 5,000 a month on it. You use 100% of your credit.
To take an extreme example, let’s say you have 10 credit cards with a $ 5,000 line of credit each and are still spending $ 5,000 per month. You now have $ 50,000 in balance, but you are now only using 10% of your balance.
This has an extremely positive effect on your creditworthiness. Why? Because it will hoist a red flag when you use almost all of your credit.
If you are using all of the available funds, issuers are wondering what will happen if they give you more funds. When you have a lot of funds that you use responsibly, card issuers see this as a low risk as they can see how responsible you are.
Applying for cards can increase your credit score
An example of a real credit score
I have over 25 credit cards, so let’s look at my actual credit history and details. On a scale from 300 to 850, my credit score is 839 and 837 with Transunion and Equifax, respectively. That’s a near perfect credit score.
Then there is a more detailed description of my score:
As you can see here, in the high impact areas, I do very well – I have a very low credit utilization (1% – that much available credit I have), 100% of my payments on time, and I have zero derogatory signs . Those are the most important things on your credit report, and my credit rating wouldn’t be this low if I didn’t have that many cards.
On top of that, my average age of the accounts is actually quite good thanks to the cards I have open long term, which always helps to maintain that number.
To be clear, my situation is not an isolated one. I keep getting emails from people who have points in the low 700s and are confused because they suggest they have a credit card and are using it responsibly.
They fear that if they apply for more cards, their scores will go down, but in almost all cases, if they get more cards and use them responsibly, their scores will increase in the long run.
Why you might want lots of credit cards
The next logical question is, “Okay, you can have a lot of credit cards, but why would you want that?”
First and foremost, my goal is to get those of you who exclusively use debit cards to switch to credit cards instead, provided you can use your funds responsibly (it’s almost never worth having a balance on a credit card).
Far too many people only have debit cards, so it’s time to start building your credit and realize that applying for credit cards can potentially improve your score rather than hurt it. Take a card like that Chase Sapphire Preferred® card (Review) or Chase Sapphire Reserve® card (Review) that offer easy-to-use points and great rewards for spending.
If you don’t want to go into points, go for something like this Citi® Double Cash Card (Verification), for which no annual fee is charged and which offers 1% cashback on every purchase and an additional 1% cashback on payment for these purchases. These rewards can even be converted into valuable thank you points if you have the card in conjunction with them Citi Premier® map (Review).
Citi has a great credit card ecosystem that you can use to earn ThankYou points
But why would you want a lot of credit cards?
Some hotel credit cards offer annual free nightly allowances
There are many misconceptions about credit cards, although probably the most common belief is that applying for credit cards will affect your creditworthiness. This just isn’t the case, at least if you use them properly and handle credit cards over the long term.
In the short term, applying for a credit card will earn you a few points, although the long term benefits more than outweigh these, including your reduced credit utilization and positive payment history.
To maintain a good credit score, I strongly recommend:
- Keep your oldest cards open even if you don’t use them often and even if you downgrade to a no-annual fee product
- Always pay your credit card bill on time (ideally early, as I explain below)
- Keep your credit utilization low, and you can do this by paying your bill before your credit card statement even closes as the balance on the close date is the calculation of the utilization
There is similar confusion about the impact credit card closing has on your credit score. You can find more information on this in this post.
Hopefully this will inspire at least some of you with debit cards or restricted credit cards to maximize your points!