Sunday, August 21st, 2011, 12:00 am
This is a question that I’m asked all the time.
Frankly, it’s not one that I’ve concerned myself with too greatly. I check my real FICO score periodically (not the FAKOs or “Fico-like” that you get with 99% of the free score trials out there that often aren’t even out of 850 and are not what the credit card banks are looking at) and it hovers in the upper 700’s, which is very good. I’ve never had a problem getting a loan due to my credit activities.
It’s not worth opening mileage cards if you don’t plan to pay off your bils on time, so this article is written for responsible people that spend within their means and don’t use their credit card as a blank check.
In the past 8 years or so since I’ve turned 18 I’ve opened and closed many hundreds of cards, earning millions and millions of miles and points that have allowed me to fly around the world multiple times in first class while staying in 5 star hotels literally for free. Our last round-the-world trip would have cost us nearly a quarter of a million dollars(!) had we paid retail for all of the airfare and hotels, yet I was able to do it for next to nothing with miles and points from opening just a handful of credit cards. For me that’s the real beauty of miles, to use them on 5 star experiences that I could otherwise never afford. Plus when you redeem miles like that each mile becomes worth 5, 10, 20, or even 30 cents instead of 1 or 2 cents when used for a domestic coach flight.
Back to the question on hand though. Here is the makeup of your 850 point FICO score according to MyFico:
-Payment History: 35%.
Pay your bills on time and you should ace this category. The more accounts you have that you pay on time the higher your score.
-Amounts owed: 30%
This measures your credit utilization ratio. The more money you spend, the higher your utilization ratio will be, which lowers your score. The more total credit you have available, the lower your utilization ratio will be, which raises your score. So the more accounts and credit you have, the better your score will be here.
Credit utilization ratio applies for each card you have individually (don’t use too much of your credit on any card) and across all of your cards collectively. A credit utilization of about 4% or 5% individually and collectively is thought to be ideal.
If you close an account and lose the credit line your score will go down. However, AMEX lets you transfer your credit line from one credit card to another so consider transferring part of your credit line to a new card before cancelling it. If you are denied for a new Chase card you can call their reconsideration department and have them close down an old card and move that old credit line to get the new card approved or simply keep the old card open and move part of its credit line to get the new card approved. In this way your credit utilization ratio won’t go up and your score won’t go down!
An important factor here is that once you get your bill for the month that spending on the bill will count against you, even if you pay it off on time! If you pay the recent activity on your card off before your statement closes your score will go up! I’ll often pay off the spending on my cards multiple times per month to keep my utilization ratio low.
-Length of credit history: 15%
This takes into account your oldest account, the older the better. It also factors in the average age of your accounts.
It’s important to note that even if you close an account, it stays on your record for about 10 years after you cancel the card! So even if you close an account you won’t hurt yourself in this category until 10 years down the line when the account falls off of your credit report. By that point you should have other older cards that will keep your average account age high enough not to adversely affect your score.
It is a good idea though to keep your oldest account open, although with AMEX even if you close your oldest account they often report newer accounts to have the same opening date as your oldest AMEX cards.
-New credit: 10%
This taken into account credit inquiries and new accounts, which can lower your score temporarily. These fall off your report after about 2 years and most banks only look at the number inquiries you have within the past 6 months.
There are 3 credit agencies (Experian, Equifax, and Transunion) and opening a card will generally only affect your score in 1 of those agencies as the inquiry only hits 1 agency. A notable exception to this rule is that Capital One hits all 3 of your credit reports, so beware that opening a card from them is 3 times as detrimental as opening other cards are.
When you apply for multiple cards (people often will do 2 or 3) from the same bank at the same time using multiple different web browsers (IE, Firefox, Chrome, Opera, etc) you can increase your odds of getting approved for multiple cards and you will generally only get 1 inquiry on your report regardless of how many cards you apply for.
The same bank will check different credit agencies depending on the state which you list as your home address. If you have an NJ address you will find that getting new cards may be harder than from other states as AMEX, Citi, and Chase all inquire from Experian. In some states those banks all inquire from different agencies so there it would be easier to get more cards if you live in those states. Some DansDeals Forum members have had success freezing their social security number at two of the 3 agencies to get approved for more cards.
In this DansDeals Forum thread members report what state they live in and which agencies each credit card bank pulled their credit from.
In the short term you may see your score drop when you apply for a card due to this category and the average age of your accounts, but in the long run having more cards will raise your score, as they improve your payment history (35%) and credit utilization (30%) and eventually the age of your account, which continue to grow older even after you cancel the card.
Types of credit used: 10%
This has little to do with the opening and closing of accounts but takes into factor if you have other accounts like ratail accounts, auto loans, a mortgage, etc. The more varied your portfolio the higher your score.
It’s worth noting that if you are young and building your score, having a parent or relative adding you onto an old account with your social security number that has a good payment history and a low utilization of credit will greatly improve your score and odds of getting approved for a card. Conversely being added onto a card that uses a high percentage of its credit line will hurt you. Being on a card with a very high credit score may make it tough to get approved for cards if you apply for a card and report a low annual household imcome number. You can also more easily get approved for a retail card, like from Gap, or a secured card, than a regular credit card. Start using those cards for a few months and then try to get your own card and start racking up those miles!
In summary, closing a card won’t hurt you in the short-term as long as you are able to salvage your credit line by transferring it to another card which will keep your credit utilization low. If you anyway keep your utilization low, or pay off your accounts multiple times per month, then it won’t matter even if you can’t salvage the credit line. In the long-term (10+ years after closing the card) there can be an effect if you don’t replace the closed cards with other cards to keep up the average age of your accounts.
Opening a new card will lower your score temporarily due to the credit inquiry and lowering of your average account age. However the inquiry will fall off your report soon enough and only makes up 10% of your credit score. The average age of your accounts will continue to get older even if you cancel the new card as it sticks around for 10 years after you cancel it. Additionally having more cards in the long-term will benefit your score as you will have more total credit which will raise your credit score and as the cards grow older your average age will go up which will improve your score.
My score has remained high even with churning by following some of these methods mentioned in this post, and now hopefully yours will too!