How Opening Credit Cards Affects Your Credit Score (hint: it’s not what you think)
Let me preface this post with one simple statement:
If you are opening up credit cards for frequent flyer miles (or any reason for that matter) and aren’t monitoring youre credit than you’re being an idiot!
If that sounds harsh, it is meant to. There are tons of free tools at your disposal to monitor your credit, and to think that its ok to just open up card after card and never check what affect it has on your score is ridiculous.
You’re asking for trouble, so if this is you, immediately sign up to monitor your credit before even thinking about getting any other cards.
How to Monitor Your Credit
If you aren’t already monitoring your credit and for some reason don’t want to, stop reading right now. I don’t want any readers who are that lazy or that unaware.
You’ll be screwing yourself over by opening cards up and not knowing what they do to your credit score, and I don’t want any part in that.
If you aren’t monitoring it, start NOW!
Here is what you should be using:
Since they are free, you might as well get both and cross-check them with each other. Better safe than sorry!
Credit Karma- A completely free website that will give you an approximation of your TransUnion score (called a FAKO score). The downside is that it that the score is only an approximation (although usually a pretty good one) while the upside is that you’ll never have to pay a membership fee, so there is no need to worry about canceling.
Credit Sesame- Just like Credit Karma, this site is completely free forever so you’ll never have to worry about canceling or being charged. Also like Credit Karma, this site will provide you a FAKO score, but this will be an approximation of your Experian score, not your Transunion score. Since they are both free, I recommend signing up for accounts with both sites.
If you are working on getting your score up or just want another reference, definitely use myfico.com. If you are happy with your score, cancel before you have to pay. If you want to raise your score, keep it open and constantly monitor it.
My Fico- The only place to get your actual FICO scores, the scores most commonly used by credit card companies. Can only get your TransUnion and Equifax scores here. Sign up for the 2 week free trial of score watch to get your score, and then make sure to cancel if you don’t wish to keep it. If you don’t cancel, it is $15/month for a minimum of 3 months.
How is Your Credit Score Calculated?
Before showing you how opening multiple credit cards affected my credit score, its important to know how your score is actually calculated. Myfico.com does a great job explaining it, so I’ll post the pie chart from there and also implore you to read up on their link if you want more in-depth information than what I’ll provide.
As you can see, the largest part of your score (35%) is your payment history. If you have multiple late or missed payments, or a collection on your account, your credit score will suffer.
If this is the case, the score you get when you monitor your credit will most likely be under 700, and therefore you won’t likely be approved for the cards I recommend here on this site. Take care of that first before trying to open up new cards. See how I personally did this with my Tips for Improving Your Credit page.
Conversely, if you continue to make your payments on time, this part of your credit score will help keep your total credit score high, even if other sections might ding it a little bit (we’ll talk about that later).
Amount owed comprises the second largest chunk at a whopping 30% and is the MAJOR reason that people can open tons of credit cards and still keep their credit score high.
It all comes down to your utilization ratio, which is the amount of debt you have compared to the amount of available credit you have.
Let’s say you have 1 credit card and you have a $10,000 credit limit. If you carry a debt of $5,000, your utilization ratio will be 50%. This is really high, and so your credit score will go down because your utilization ratio is high.
So, how can opening more credit cards actually help your credit score?
Each time you open up a new card, you get more available credit. Let’s say in addition to your 1 card with a $10,000 credit limit, you open up 2 more cards, and each of them have a $10,000 limit as well.
Now, you have a total credit limit of $30,000 and your debt is still $5,000. Instead of a 50% utilization rate, you know have a 16.6% utilization rate, which is much better, and will boost your credit score!
A utilization rate of under 30% is recommended, but I personally always try to keep it under 10% at any given time, and obviously ALWAYS pay my balance in full at the end of each month.
Length of Credit History
Your length of credit history is a smaller part of your overall score, but is still one you want to try your best to keep as high as possible.
This doesn’t mean that you can’t cancel credit cards after a year when the annual fee becomes due, but it does mean that you should try to get a few cards that you plan on keeping open for the long-term.
This includes cards that have no annual fee (Chase Freedom, Amex Hilton) or cards that have annual fees but also offer an anniversary bonus that cancels out the annual fee (Barclays USAirways card, which has an $89 annual fee but gives you 10,000 free miles each year).
Pick a few of these cards and keep them open indefinitely. This will help balance out the cards that you get simply for the signup bonus and then cancel after 11 months because you don’t want to pay the fee.
If you are new to the miles and points game or a younger person looking to build credit, I’d suggest first looking at cards you want to keep open and grab 1 or 2 of them before you start going crazy with applications.
Since you have less credit history to play with, opening up a few and canceling them within a year will have a stronger affect on your average length.
Every time you apply for a new form of credit, the company will make a “hard pull” of your credit report.
This only makes up a small proportion of your total score, but if you have too many hard pulls in too short a time, you will get denied credit cards because of “too many recent inquiries.”
This is why I urge everyone to wait at least 90 days between App-o-Ramas if you are doing them.
If you do apply for multiple cards at once, you’ll usually get an initial ding on your credit score (a good estimate is 2-5 points per card). Your score will usually bounce back from that within 3 months.
So, What is the Overall Affect on My Score?
Opening new credit cards can affect you negatively in the “Length of Account History” and the “New Credit” areas, which make up a total of 25% of your credit score.
However, opening up new credit cards can affect you positively in a dramatic way in the “Amounts Owed” category immediately and to a lesser degree, the “Payment History” category over time.
Even if we just look at the Amounts Owed category, that makes up 30% of your total credit score, and the new credit cards will greatly improve this area of your score since it will lower your utilization ratio.
Last time I checked, 30% was greater than 25%, so the net effect of opening new credit cards can actually be positive! As long as you don’t abuse your credit cards and go in to debt (which would screw you regardless of whether you have 1 or 100 credit cards), you shouldn’t see a substantial drop in your credit by opening new cards.
My Personal Experience
Back when I started looking in to frequent flyer miles in March 2011, I had a credit score of 605 (according to myfico) and couldn’t get approved for a single card.
I came up with a plan to improve my credit, outlined on the Improving Your Credit page, and by June 2011 had my score in the 700’s and applied for my first card.
Since then, I have applied for 11 cards over the last 12 months and gotten approved for all of them except 1 (that freakin’ Citi/AA Visa business card)!
Here is what my credit score looks like on both Credit Karma and Credit Sesame as of July 23, 2012, dating back to January 2012 when I opened my accounts (prior to that, I had only been using myfico.com)
The Credit Sesame score doesn’t show us much except that it seems as if my credit score has stayed almost completely stable since January even though I’ve opened up 4 new cards since then.
The Credit Karma one gives us a little better look at what is the usual pattern for most people who open multiple credit cards. After pulling off a 4 card App-o-Rama in April, my score dipped in May when all the cards were reported as being opened to my credit report.
After that small dip, it has started to increase since, and has actually risen by about 10 points from where it was before I did my App-o-Rama.
I’ll be the first to admit that it this is a small sample size but I do think it highlights the type of credit score behavior that many people who apply for multiple credit cards experience.
I know many people who are part of this frequent flyer mile “game” and have been so for a lot longer than me and I have yet to hear a report about a credit scoring tanking simply from opening up new cards.
As long as you are diligent in paying them off and not running a balance on them, the fact that you will be improving your utilization ratio in your “Amount Owed” area will counteract the negative impact of the “Length of Credit History” and “New Credit”.
1. Monitor your credit. If you don’t do that, I have nothing more to say to you. You are digging your own grave.
2. Each person’s score is unique, which is why you need to MONITOR YOUR CREDIT! If you aren’t sure how opening a card will affect your credit because you haven’t done it before or have just a short credit history, start slowly by opening up one at a time and then go from there.
3. Try to find a few cards that you plan to hold on to for a long time to help build your length of credit history. You don’t have to keep all your cards open, but you do need to have some to counter-balance the ones you do close.
4. Always pay off your balances in full each month. It shouldn’t even have to be said, but if you are running a balance on your credit cards and paying interest on them than any perks that you are getting from the card like frequent flyer miles aren’t worth it.
While I always appreciate reader comments, I’d especially like to hear your experiences with how opening up credit cards have affected your credit scores.
This is one of the most common questions I get asked, and also one of the most important, so I’d really, REALLY appreciate readers weighing in and sharing their experiences, tips, and resources so that we can all continue to keep our credit scores healthy!