Monday, August 11, 2014

Credit Score Management

Credit card signup offers are the single easiest way to earn a large number of miles or points with little effort.  Personally, the majority of my miles come from manufactured spending, but in the past year Mrs. PointsNinja and I have gotten some really great card sign up bonuses:

  • Barclay Arrival Card -         40,000 points ($400)
  • Delta Amex -                         50,000 miles
  • United Explorer Visa -          50,000 miles
  • Lufthansa Visa -                     50,000 miles
  • AA Executive Mastercard - 100,000 miles
The key to being able to take advantage of bonuses like these is to maintain an "Excellent" credit score (generally above 760).  In talking with folks who are just getting interested in points & miles, I find that many have a misconception about the effect that new credit accounts have on their overall credit score.

Generally (Ed.: Really, really generally), your credit score is based on five factors:
  1. Your Payment History:  This is the big one, accounting for 35% of your score.  Obviously lenders are going to be interested in whether you're consistent about paying back what you owe.  Pay every month, on time, and you'll be in good shape.
  2. Credit Utilization:  This is another big one, accounting for 30% of your score.  This factor is made up of two parts.  First, the percentage of your available credit that you're currently using; i.e. if you have $100,000 in available credit across all your cards and your monthly balances amount to $25,000, you have 25% utilization.  Second, you percentage of available credit used in each individual account, i.e. a $1,000 balance of a card with a $2,000 limit is 50% utilization.
  3. The Length of Your Credit History: Now we're getting into the smaller factors.  The average age (older is better) of your accounts makes up 15% of your score.  This is a good reason to keep older cards, especially if they have no annual fee.
  4. Credit Mix: This is another small category, accounting for 10% of your score, that takes into account whether you have a mix of installment (e.g. mortgage) and revolving (e.g. credit card) accounts.
  5. New Accounts: The number of "new" (one year old or less) accounts in your credit file makes up the final 10% of your score.  These are generally tracked based on when the card issuer makes a "hard pull" of your credit file to gauge your creditworthiness.  Hard pulls generally stay on your credit file for 2 years, though they have a diminished weight as time goes on.
Applying for a new card can affect your score in several ways.  The new account can shorten the average length of your credit history and the inquiry will be appear as a "new account."  But, as a bit of an offset, the new credit line may actually decrease your credit utilization.

So what does all this mean?  Well, I'd say it means that you shouldn't be unduly worried about the effect that a new card will have on your score.  As a rule of thumb, expect that a new card application will result in a temporary (drop your score by 3-6 points.

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