March 10th, 2014
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I’ve been blogging about deals for over 9 years now, but my passion is in miles and travel, I live and breath those deals and am a hopeless addict. There can be worse addictions, I’ve been able to fly with my wife and kids on hundreds of first class flights and stay in 5 star hotels for practically nothing. There’s no great secret in how I accumulated over 20 million miles and points as well as several lifetime elite status levels. It’s just about taking full advantage of everything from signup bonuses to dollar coins to Wendy’s cups to Faster Free Nights to………….
Many people are scared of credit cards for a variety of reasons but only one is valid: buying things they can’t afford and falling into debt. Once you fall into a debt trap the entire thing will become a net loss, guaranteed. Otherwise they represent the lowest hanging fruit in the miles and points world.
Here are some of the most common questions I get asked:
Q: Isn’t it bad for your score to close a card?
A: I have a FICO in the 800s, among the best scores in the country. And I’ve closed hundreds of cards.
Understanding how your score works is key here. The 2 primary factors making up 65% of your score are your payment history and the amount of money you owe. So always make sure to protect those.
A credit card continues to benefit the length of your credit history (the 3rd most important factor at 15% of your score) for 10 years after its been closed.
The only negative outcome of closing a card is losing the credit line, which can hurt your credit utilization. That can be avoided in several ways. Many banks allow you to move a line of credit onto a different card. Some banks may be more willing to approve you for another card contingent on moving part of line of credit from an older card onto a newer card. Or they may want to completely close out the older card and move the entire line onto the newer card.
Now you have to strike the right balance between your income and your total credit. You don’t want to have too much total credit. So don’t sweat it if you have to close a card, you can always get another to get your credit line back up to where it was.
Note that while you can close a card via secure message or chat without having to call up, typically if you call up, the retentions department may offer to waive the fee for another year or give you miles to keep the card. Even if they don’t do that many cards can be downgraded to a free version and you’ll get a refund of the annual fee. You have between 30 and 60 days from when an annual fee is billed to have it refunded if you close a card.
Q: Isn’t it really bad to close your first ever credit card?
It’s a good idea to start off with a no-annual fee card as your oldest card so you don’t have to close it. For example, Chase Freedom is a great no-fee card.
If you have one card which is wayyy older than other cards then you will want to keep it open and that establishes your credit length.
However, if your oldest card is not that much older than the next card, it won’t make a big difference.
Either way it will take 10 years after closing your oldest card until it falls off your report. So even if your oldest card is 2 years older than your next card in 10 years from now that won’t make a big difference.
Note that AMEX always reports every card you open as being opened in the year that you first got an AMEX card. So if an AMEX was your first card then don’t sweat it as you can always get that date again by just opening a new card.
Q: Isn’t it bad for your score to open a card?
A. When you apply for a card a credit inquiry or hard pull is done on your report. New credit is one of the 2 smallest factors in your score. It makes up 10% of your FICO score and a hard pull can lower your score by a few points. However, the negative effects of a hard pull lessen after a few months and most banks only care about the number of hard pulls from the past 3 or 6 months. After 2 years they fall off completely.
A new account will also temporarily lower the average age of your accounts, a subset of the 15% of the length of credit history category. However that card will eventually improve your average age as it continues to help for that even if you close it for 10 years after you close it.
More importantly, when you get a new card, you get a new line of credit. 30% of your score is made up of amounts owed and credit utilization so the more credit you have, the better your score.
So the answer is that in the short-term your score may go down slightly, but longer-term your score will only go up.
Once you use that pull and apply for a card be sure you actually get that card! It can take several tries, but typically calling or writing (via SM or even snail mail) to reconsideration departments can turn a denial into an approval, especially if you are an existing customer.
Q: Are there any tricks to raise your credit score quickly?
A: There are a few.
1. Try to pay off your credit card bills before the statement prints. Once it prints the amount owed can severely hurt your score even if you pay it off on time. I try to pay off everything but $1 so that when I get the bill in the mail I have a $1 amount owed. That shows the card is still being used, but that it’s not being maxed out.
Even if it’s too much for you to do this try to at least keep your spending when the statement closes under 25% of the credit limit of your card.
Amounts owed is 30% of your score, so this is a quick and easy way to get a nice bump.
2. 10% of your score is made up by the types of credit you have used. Have cards from multiple banks and have other kinds of loans as well.
For example, even if you can afford to pay for a car in cash you should finance it. First of all, you can usually get a nice instant rebate by financing and there’s typically no penalty to pay if off early. Second of all, once it’s paid off you’ll get a nice score boost.
3. Use business cards. Amounts owed on business cards from banks like AMEX and Chase aren’t reported on your personal credit report. So even if the statement closes with a large amount owed it won’t hurt your score like that would on a personal account.
If you even just have a hobby or want to start a business you can open up a card as a Sole Proprietor and just use your social security number instead of the Tax-ID number.
Q: I don’t make my own income, how can I get a credit card?
A: Recently the CFPB ruled that as long as you live in the same household as someone who you can rely upon to provide from their income you can include all of that household income when reporting your income on a credit application.
Income isn’t listed on your credit report, it’s based on what you report.
Q: I don’t have any cards yet and always get rejected, how can I build up my credit?
A: Start by having someone in your household or a relative add you as an additional user onto their account. Be sure that the account has been open for a while and is used responsibly and not maxed out.
After a couple months you should get a nice boost from that. Start by applying for a store card like from Gap, Kohls, Macy’s, Target, etc. as those can be easier to get approved for than real credit cards. Use the store card for a couple months (making sure to just leave $1 or so for when the bill comes to you) and then try for a real credit card.
Still not having any luck? Get a secured card. A secured card functions as a debit card except that unlike a debit card it helps your credit score. Most of these cards don’t offer miles but some like the USBank LAN card at least offers something decent.
Some banks offer a student card like Discover It Student that can also be easier to get than regular credit cards.
Q: Why is my credit score different depending on where I check it?
A: There are thousands of sites offering to give you your credit score for free. They just want your info to be able to sell you ads and other products. Their scores are called FAKOs and are basically meaningless. They look at your report and based on their own criteria make up a score on the spot. No creditor is ever going to use that score.
The only place where a consumer can buy their real FICO credit score is from MyFico.
You should always keep tabs on all 3 of your reports by using annualcreditreport.com, the only government sanctioned credit report site. If there are mistakes then be sure to dispute them!
There are 3 credit bureaus, Experian, Equifax, and Transunion, so you will have a FICO score for all 3. Some banks, like Barclays and Discover, allow their cardholders to view one of those scores for free. Some cards, like American Express Starwood and Delta also give you your FICO Experian score via mail when you apply for a card.
To make things more complicated there are different versions of FICO scores based on criteria set in ’98, ’04, or ’08, but that’s getting way beyond the scope of this article.
Q: 3BM? AOR? What in the world is everyone on DDF talking about?
DDF, or the DansDeals Forums is chock full of good info when it comes to credit cards. The acronyms thread can help you decipher the maddening abbreviations used there. The Start here thread offer a good place to start learning more as well. Take a look at the FAQ thread as well.
In short though, a 3BM means using 3 web browsers, like Internet Explorer, Chrome, and Firefox, to apply for 3 different cards from the same bank, as close to each other as possible. Personally I’ll fill out the application form on all 3 browsers and then hit submit on all of them within a few seconds. This way you can get 3 cards with just 1 credit pull. There’s no guarantee you’ll get accepted to all 3 or that you won’t get more pulls, but this increases the odds of getting multiple cards with 1 pull.
An “AOR” or app-o-rama is the process of using multiple 3BMs from multiple banks as quickly as possible, in order to get approved for more cards from more banks. People sometimes stagger their AORs every few months to get more approvals.
Note that when applying for a Capital One credit card you will get 3 hard credit pulls every time you apply for a card, making them one of the more hated banks out there.
Q: So Capital One checks all 3 bureaus, but where do the other banks check?
It generally varies based on your home state. This DDF thread tried to make sense of the madness.
If you’re in a state where one of your reports is getting hard hit you may want to freeze that report and have a bank check another more seldomly used report to increase the odds of getting approved for a card. More info on freezing from Equifax, Experian, and TransUnion. Note that some banks, like American Express, won’t be willing to check a different report and you may have to try a few times to find a rep from other banks to do it as well.
Q: But so and so expert says to always use debit cards and to cut up your credit cards?
A: If you can’t control your spending on a credit card then he’s right.
Otherwise that’s terrible advice. Not only do you throw away valuable miles by making purchases with a debit card, you also lose out on the protections that credit cards offer.
When fraud happens on a credit card you are not responsible for it while it’s being investigated. On a debit card those funds are immediately taken out of your checking account and you have to fight to get them back.
Plus credit cards offer awesome benefits like return protection and warranty extension that you won’t get from your debit card.
So just use them responsibly and reap the benefits!