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Credit Scores and Credit Cards

10:29 PM

Source: MyFico.com
One of the questions I’m most frequently asked is ‘doesn’t applying for all these credit cards ruin your credit?’  That is a very legitimate question because your personal credit score should be safe guarded.  Having been a mortgage loan officer I understand the importance of a good credit and how it affects your interest rate and eligibility for borrowing money.  I’m not a financial expert, loan officer or credit expert, but this information is based on my own experience and research.  I'm sharing my personal experience and understanding of credit card applications and the affects on your credit score.  

Check your credit score
I recommend using www.myfico.com to check your credit because they provide you with your credit score AND your full credit report.  They offer a 10 day free trial and once you’ve pulled your credit and saved your report you can keep the service or cancel it.  There are a lot of websites that claim to check your credit score and the Fair Credit Reporting Act (FCRA) entitles you to a free copy of your credit report once a year at your request from annualcreditreport.com.  The problem with a lot of these free credit reporting sites is that they only give you your credit score, but don’t give you your credit report (that costs extra).  MyFico.com gives you both your score and your report with the 10 day free trial.  It is recommended to check your credit report once a year.

Source: MyFico.com

Review your credit report
Once you’ve checked your credit from MyFico.com carefully check every item on the credit report and make sure you recognize outstanding debt and credit cards.  If you see any discrepancies work on getting them fixed or removed from your credit report. 

Understanding your credit score
FICO score is another name for credit score.  This chart details how a credit score is calculated.  You can see 35% of your credit score is based on your payment history.  You want to remember to all your outstanding debt on time and to avoid late fees and late reports on your credit report.  Then 30% of your credit score is based on amounts owed or outstanding debt that still needs to be paid off.  It’s important not to keep a hefty balance on credit cards because this affects your future credit card approvals.  You can see new credit only has a 10% impact on your credit score.

Source: MyFico.com 

Credit card applications
When you apply for a new credit card you are always asked for your social security number.  The reason for this is that the credit card company is going to pull your credit to see how much outstanding debt you have, if you pay your bills on time and the amount of credit they should offer to you.  Typically when a credit card company pulls your credit it will take 3-5 points off of your credit score.  The good news is that over time if you keep the credit line open, pay your bills on time and don’t keep a balance on the card then you get these points back in addition to other points. 

“In general, credit inquiries have a small impact on one's FICO score. For most people, one additional credit inquiry will take less than five points off their FICO score.” - From MyFico.com

My credit history
I pulled my credit in October 2012 at MyFico.com and I had a huge credit report!  I had over 30 items on the report and over 25 of those items were credit cards.  Eight of those credit cards were the same card for one airline and another five were credit cards for another airline.  My score in October 2012 was in the 790s.  I recently acquired some real estate and my lender pulled my credit a few weeks ago and eleven months later my score is one point higher, even though I’ve applied for several credit card this year.  Credit scores range from 300-850.

Wise ways to apply for credit cards
There’s no doubt that frequent credit card application frenzies can negatively affect your credit and that you shouldn’t apply for every credit card offer you see.  Use prudence and be conservative.  I recommend applying for only 3-4 credit cards per year, but that my still be too aggressive for some people.  Usually it takes about 3 months to fulfill the spend requirements for most credit cards anyway.  Here are some additional credit card tips.
•       Pay your bills on time
•       Pay off your balance in full each month
•       Pay off debt rather than moving it around
•       Space out credit card applications (3-4 year)
•       Don’t open credit cards if you’re buying or refinancing a home soon (180 days out)

Keep them or close them?
Most travel cards have an annual fee and some credit card companies waive that annual fee for the first year.  I recommend keeping the credit card open for as long as possible until the end of the year and then either keep it, cancel it or convert it to a card that doesn’t have an annual fee.  One of the benefits beside the miles and points to opening credit cards is it can positively build your credit history, especially if you pay your bills on time and card a low balance. 

Final Thoughts
Your credit is an important personal asset and should be protected and handled carefully.  From my perspective a few points off my credit score for applying for a travel credit card every few months and making family memories is worth it!  Be cautious about opening new lines of credit when applying for a mortgage or other major loans.  You'll want to make sure to keep your credit above 740 to get the best interest rates.  Talk to a loan officer or financial pIanner to get more information about your current credit situation.  I welcome your comments and feedback!

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Disclaimer: Ideas in this blog post are from my own personal experiences and actual results may vary based on offers available at the time.  This is not professional advice.

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