Thursday, April 11, 2013

Travel Credit Cards - Credit Score FAQ

Chapter 1 - Three Types of Travel Credit Cards
Chapter 2 - Credit Card Churn Example
Chapter 3 - Credit Score FAQ
Chapter 4 - Tracking Your Points/Miles
Chapter 5 - Meeting Minimum Spend Requirements
Chapter 6 - Maximizing Regular Spend

For some reason, my father had to take a course in 6th grade called Home Economics. But don't let the term Economics fool you. He didn't learn how to balance his checkbook, save for retirement, or do his income taxes (skills he'd need when he grew up).

Instead, he learned how to bake bread, sew fabrics together and a variety of other menial household tasks things that most people just pay illegal immigrants to do for them when they grow up.

But it would have been helpful to teach America's youth about how money works, because most people I meet are clueless, or worse, they just repeat mis-information that they heard from another clueless person. Lucky for me, I have super annoying thoughtful parents who will make sure I know everything about anything about money.

I'll assume you all know what a credit score is. It's a metric for your expected ability to borrow and pay back debt. It completely ignores your income level.

The exact FICO formula is kept top secret, but you can get a sense of what factors into your score: 35% payment history, 30% amount borrowed (as a % of total available), 15% length of credit history, 10% recently opened credit and 10% types of credit.

Instead of discussing everything, I'll just give you this link here from MyFICO.  But I will highlight a few things that are important for you to know.

1. Is my score good enough to get approved for Travel Credit Cards?
  • Travel Credit Cards are usually only approved for people with "top" credit scores with "Top" defined as 700+ (out of a total of 850).
  • Having no/little credit history can make it difficult to get approved as well. Oddly enough, never having any debt is a bad thing, because you haven't demonstrated you're able to borrow and pay back debt.
  • But if you have bad credit, then please don't apply for any more credit cards. That's the last thing you need.
2. Does applying for a credit card lower my score? 
  • An application will result in a "Hard Inquiry" which will lower your score by ~5 pts per inquiry because people looking for more credit are seen as riskier. 
  • So applying for 4 cards may temporarily reduce your score by 20 pts.
  • But there are 3 different Credit Bureaus (Experian, Transunion, & Equifax) and an inquiry is usually made on just 1 of the agencies, so only that particular score will go down.
  • However, some banks (like CapitalOne) will pull a Hard Inquiry on all 3 agencies for a single card application.
  • The impact of a Hard Inquiry is less over time, so after some time (some say ~90 days), the Hard Inquiry is not as important to your score - which is why people do their credit card churn every 90+ days.
3. I have a FICO score of 810 and I don't want it going down. I should avoid Credit Cards right?




  • Having any score above 740 simply falls into the "Excellent" category.
  • So a person with 810 score will be treated the same as a person with a 750 score by a lender.
  • Despite what my father thinks should happen, there's no "Ultra-Excellent category."

  • 4. How do I bring my score back up? 
    • Being approved for a new credit card will ultimately increase your score, because you will get a new additional credit limit which will increase the total amount of your available credit.
    • Then assuming you don't max out your new card, your Debt Ratio (% amount borrowed) will decrease, making your score go up.
    • Additionally, paying your bill every month will contribute to a strong payment history.
    5. I heard I should close my unused credit cards instead of keeping them open. What happens when I close my card? 
    • Similar to #4 above (but in reverse), closing a card will lower your total credit available, thus increasing your Debt Ratio (higher risk) and thus, will lower your FICO score.
    • Better option is to call and shift your available credit to a card you're going to keep open and then close the one you want (or downgrade it to a no-free credit card).
    • And keeping your card open for a long period of time is actually good for your credit score because a longer credit history is better, but it's not worth it if you're paying an annual fee.
    6.  I'm thinking of buying a home/car soon. How does that factor in?
    • Recent credit inquiries are seen as risk to a lender (mortgage, car loan or credit card issuer). 
    • While inquiries over 90 days ago are less important than more recent inquires, they still show up on your report.
    • However, inquiries over 2 years are removed completely.
    • So if you're looking to get approved for a big loan in the next few years, you'll want to stop applying for cards (at least 2 years in advance) and have a clean credit report to show the bank.
    7.  Does carrying a balance impact my score? I heard you should carry a very small balance to improve your score.
    • You should pay off your card in full every month by the Payment Due Date, because the % interest you're paying will be more than the value of the frequent flyer miles/points you earned.
    • But if you're unable to pay it off in full, then as long as you make the minimum payment, your credit score will be fine.
    • Oddly enough, having a low (1-3%) Debt Ratio is better for your score than a 0% Debt Ratio, but that doesn't mean you should carry a balance (after the Payment Due Date).
    • The Debt Ratio is calculated based on the balance at the Monthly Statement Close Date (not the Payment Due Date that is ~20 days later). Even if you pay the entire balance off in full day after your Statement Close Date, your Debt Ratio doesn't change until the next monthly statement close date. 
    8. Does checking my credit impact my score?
    • Checking your own score is called a Soft Inquiry and doesn't affect your score at all.
    • There are multiple ways to check your score for free including "FAKO" scores that are calculated by free websites like CreditKarma.com and CreditSesame.com which my father uses regularly. 
    • FAKO scores not official FICO scores (that use the official secret formula) but use publicly available information and calculate their own scores (which is close enough for most).
    The takeaway message is this:  If you're disciplined with your spending and responsible with your credit, you can apply for multiple credit cards, earn the bonus rewards, and keep your score high enough for next round of credit card applications. But take 2 years off before you apply for a mortgage or car loan.


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