One of the biggest concerns for people new to the points and miles game is their credit score. After all, we’re told that opening a lot of credit cards will hurt our credit score. And then, when it comes to closing them, that’s even worse! At least that’s what we’re told. However, there are multiple variables to your credit score. Once you understand them, you will find that this strategy is actually not that bad for your credit. In fact, you may see your credit score go up!
Before we get into the details of how credit scores work, let’s talk about why a good credit score is important. In today’s world, if we want to pay for anything using a loan, a credit score is necessary and can save us money in the long run. The classic example is if you are wanting to buy a house or a car. When a bank is looking at your loan application, your credit score will be a huge factor in whether or not you can get a loan as well as what the interest rate will be. In short, the higher your credit score the lower the interest rate and the less you end up paying. However, there is a diminishing return the higher your credit score is.
The key here is that once you reach a certain credit score, you get the lowest rate. Usually that score is around 760 though a score of 780 or better may get you a lower interest rate in some cases. Credit scores can go as high as 850, so that gives you a huge range of scores that will still get you the same interest rate.
Because of this, once you reach a score over 760, you have more leeway to do things that may lower your credit score slightly. As long as your score doesn’t dip too low, following the points and miles strategy won’t actually affect your credit score in any significant way. If your score drops a few points, who cares? You still have an excellent credit score. Now, let’s get into the details of how credit scores work so we can see how the points and miles strategy actually affects your credit score.
How Credit Scores Actually Work
Credit scores are determined on a number of weighted factors. Certain activities are going to affect a score more than others. These factors are as follows (listed from highest to lowest impact)
- Payment History
- Credit Utilization
- Length of Credit History
- New Credit
- Credit Mix
The biggest factors by far are your payment history and your credit utilization. These two factors together make up for the majority of your credit score, so these are the most important. However, it is important to understand how the other factors affect your credit score as well.
Let’s start with payment history since it has the largest effect on your credit score. This is also the easiest to understand. Always make payments for your card by the due date and your credit score will be great. Any late payments will hurt your credit score. Especially if these missed payments go to collections, that is the one of the worst things that can happen to your credit score. Previous bankruptcies will also factor into this part of your credit score and can be very difficult to overcome.
So, the best thing you can do for a credit score is to make payments on time no matter what. Two important notes on payment history.
- Even if you carry a balance from month to month, you could have a great payment history (i.e. always paying at least the minimum payment on time).
- Paying your card before a statement is generated (i.e. you get a statement with a $0 balance) can be counted as no payment in some cases. It’s best to leave enough of a balance on your credit card each month for a statement to be generated, then pay it off by the due date. (Automatic payments can be a great way to handle this without having to think about it too much).
Now that you understand how payment history affects your credit, let’s talk about the next most important factor: credit utilization. Credit utilization is looking at the balance of all of your lines of credit compared to the available credit. Simply take your balance divided by the credit limit. For example, if you had a $4,000 balance across multiple cards with a total credit limit (sum of credit limits on all of those cards) of $50,000, your credit utilization would be 8%. Lower credit utilization is a good thing and will help your credit score.
There are three ways to decrease your credit utilization: pay off some/all of your balance, increase your credit limit on a card, or get another card. The higher your credit limit, the lower your credit utilization. The lower your balance, the lower your credit utilization limit. You can really make a huge difference by adjusting both of those at the same time.
The next factor to your credit score is the length of your credit history. Simply put, the longer you’ve had credit the better. There are multiple things that a credit bureau will look at, the age of the oldest account, the age of the newest account, and the average age of your accounts. By far the most important thing to do is to keep at least one account open for a long time. This improves the age of your oldest account and the average age of all of your accounts.
Closing an account (such as a credit card) can affect your score, but not as badly as you may think. In many cases, your closed account stays on your credit score for up to 10 years. This means you are still getting the benefits of the account and the age of the account. After 10 years, it falls off, removing the advantages regarding the age of the account. However, as long as you keep your oldest account open, you won’t see any significant impact on your credit score.
Opening new accounts will decrease the average age of your credit, but again, as long as you keep your oldest account open, you will most likely not see any significant impact. Consistently opening new accounts can prevent your credit score from increasing dramatically. However, since length of history is a slow moving variable anyway, and also has a lower impact, you can still open multiple cards a year without dramatically affecting your credit score.
New credit accounts create hard inquiries which stay on your credit report for 2 years. Hard inquiries will lower your credit score, but are far from the highest impact on your score. As long as you have a good payment history, credit utilization, and length of credit history you most likely will not see a significant decrease in your score.
Your credit score also looks at the different types of credit you have. Specifically, the more types of credit you have the better. So having a mix of credit cards, a mortgage, car loans, student loans, or personal loans is good. Again, this is a lower impact factor (same impact as hard inquiries) so it’s not the most important thing to worry about, but can be useful to improve your score.
How These Factors Affect Points and Miles Strategies
Now that you have a good understanding of how credit scores are determined, let’s look at how opening and closing multiple accounts will affect your credit score.
Opening multiple cards increases the number of accounts (which can be good for your credit mix) and will decrease your credit utilization rate. Both of these are good, especially the credit utilization rate since it has the highest impact on your score out of the two. The negative impacts will be on your average age of credit and the new hard inquiry on your report. Both of these have a lower impact on your score, but could still decrease it. Comparing the positive and negative impacts, the positive impacts outweigh the negative impacts, so you most likely will see a minimal decrease, if any at all when opening multiple new cards throughout the year.
Closing cards that you no longer use typically will have negative impacts to your credit score. Closing an account may or may not have a significant impact on your length of credit history. Since closed accounts can stay on your report for up to 10 years, you may not see any difference at all. Your credit utilization could also decrease when you close an account, since you lose the credit limit on that card. Overall, closing a card could impact your score negatively, but not necessarily by a lot if you still have a high enough credit limit across your open cards and a good history of credit. This is why downgrading a card to a no-annual fee card or even keeping the card open is often a better decision. However, don’t be afraid to close an account (especially if it has an annual fee) if you aren’t going to use it any more. It’s not worth the extra fees for something you don’t use.
As you can see, the commonly heard statements about opening and closing credit cards can be misleading. While they are technically true, they don’t take all of the factors into account. In fact, most people that get into the points and miles game and open lots of cards will see an increase in their credit score. For example, I opened a couple of cards my first year, and my credit score went up about 20 points over that year. There’s no guarantees on what will happen to you, but it most likely won’t be as bad as you think as long as you always pay your cards off in full each month and keep your oldest account open.