There are a lot of misconceptions about how credit scores are calculated. When I explain to people that I have 20+ credit cards open at a given time, the first question I’m usually asked is “doesn’t that ruin your credit score?!”
The answer is no, and that in many cases it can actually improve your credit score. But it’s very difficult for that to “click” with people. So I figured I’d explain in more detail, in part by sharing my own credit score.
In this post:
My credit score is excellent
My Experian credit score is currently 809 (on a scale of 300 to 850), which is better than a vast majority of consumers. To be honest, my score is lower than it was earlier this year (when it was 837), as I’ve applied for quite a few cards, and have been a bit sloppy with keeping my card utilization really low.
That being said, there’s really not much benefit to having a credit score of 840 vs. 800, for example, as either will qualify you for just about anything you may want. So while a super high credit score might be nice for bragging rights, there’s limited value beyond that. 😉
What’s the secret to a good credit score?
A lot of people are confused about how credit scores are calculated in the United States. To summarize, here are the major factors that determine your credit score:
- 35% of your score is made up of your payment history
- 30% of your score is your credit utilization
- 15% of your score is your credit history
- 10% of your score is made up of the types of credit you use
- 10% of your score is your request for new credit
How is it possible to have an excellent credit score while having a large number of credit cards open, and also consistently applying for new cards? Below are a few tricks that people easily overlook and/or can’t fully wrap their heads around.
Always make payments on time
35% of your credit score is made up of your payment history. That couldn’t be easier. Just pay your bills on-time, and you’ll basically get “perfect marks” for a third of your credit score. If you’re going to be involved in this hobby you’ll want to be well organized, which isn’t a lot of work, really. Just make sure you have payment due dates in your calendar, and have payment alerts set up.
Not only will you be hit with fees for making late payments, but your credit score will also be hit.
Keep your credit utilization low
30% of your credit score is made up of your credit utilization. This simply refers to what percentage of your overall credit you’re using.
Let me give an example. Say you have 10 credit cards, and have a $10,000 credit line on each. That means you have $100,000 of available credit. If you spend $90,000 on your cards each month, you’re utilizing 90% of your credit. That looks risky to the banks, because they start to wonder if you’re getting close to charging things you can’t actually pay for
Conversely, if you have $100,000 of available credit but only spend $1,000 per month, you’re only utilizing 1% of your credit. If you apply for new credits, the banks view you as low risk. Because you’re clearly not trying to max out your credit lines.
It actually helps to have a lot of cards, so that your overall available credit is high, while your utilization is very low. There’s one other trick here — pay off most of your credit card balance before the statement even closes. In other words:
- Say the closing date for a credit card is April 1
- The payment due date is usually a few weeks after that
- I simply pay most of my credit card bill two days before the statement even closes (in this case, March 30)
- That’s because what’s being reported to the credit bureaus is your utilization at the time your statement closes; so even if my credit line is $10,000 and I spend 90% of that, if I pay off most of that balance before the statement even closes, then the utilization rate will be super low
Keep some cards for a long time
15% of your credit score is made up of your credit history. One thing that largely factors into this is your average age of accounts.
In other words, the issuers want to see that you’ve been using credit consistently and responsibly for a long time. After all, if you’ve never had a credit card before and then suddenly get five at once, they’re not sure if you’ll be able to handle your credit responsibly (which is why it makes sense to apply for more cards gradually).
So while I apply for a lot of new cards, it’s important to also keep some cards long term. This is why I highly recommend a combination of cards that are worth paying annual fees on, as well as no annual fee cards that add value as well. Some cards are worth getting for their return on spending, while others are simply worth getting for their ongoing perks.
Not only are those cards worth it for the benefits they offer, but the added feature is that they help my credit score. That’s also why I do everything I can to keep no annual fee cards open, even if I don’t get much value from there.
That’s 80% of your credit score right there
The above alone accounts for 80% of your credit score. If you play your cards right (no pun intended), your score could actually be higher if you have a lot of cards than if you only have a few cards.
The last 20% of your credit score is made up of a combination of the types of credit lines you use and your requests for new credit. The former refers to having diversified credit lines (credit cards, mortgages, etc.) — the more variety you have, the better. It might seem backwards, but having a home mortgage or car loan can actually help your score.
The only part of your credit score that will negatively be impacted by applying for new cards is your requests for new credit, whereby your score will be temporarily hit by a few points for the inquiry. After 24 months that falls off your report, though, and you’ll just reap the positive benefits of having a lot of cards.
Bottom line
I’m sure most OMAAT readers already know that applying for lots of credit cards doesn’t necessarily hurt your credit score, and in many cases even helps it. But for those who are “doubters,” hopefully this helps with seeing how credit scores work in practice.
I doubt I’d consistently have such a great credit score if I didn’t have so many cards, since it really gives you quite a buffer in terms of credit utilization, average age of accounts, etc. So maximizing credit card rewards isn’t just useful in terms of accessing great rewards, but it can also have a positive impact on your credit score.
Don't see the point of doing this.
I have had two credit cards for several years. I just ask the banks to increase the credit limit on both, resulting in the same credit level that you attain having many credit cards.
Sure, if you don’t care about perks and SUBs.
Also for most of us… expecting 50k line of credit on a single card is a big ask, even with BofA and citi who can be quite generous.
I’m not familiar with the term SUBs. Perks are provided based on your spending. To access these perks, you must meet certain minimum spending thresholds. If these align with your usual monthly expenses or involve a necessary, one-time purchase, that’s reasonable. However, deliberately increasing your spending just to earn these rewards strikes me as financially irresponsible. Moreover, it contributes to the larger issue of overconsumption, which depletes the planet's finite resources and fuels toxic consumerism.
I’m not familiar with the term SUBs. Perks are provided based on your spending. To access these perks, you must meet certain minimum spending thresholds. If these align with your usual monthly expenses or involve a necessary, one-time purchase, that’s reasonable. However, deliberately increasing your spending just to earn these rewards strikes me as financially irresponsible. Moreover, it contributes to the larger issue of overconsumption, which depletes the planet's finite resources and fuels toxic consumerism.
I have friends who "don't see the point" of flying in longhaul International Business/First. Others "don't see the point" of staying in 5-star luxury hotels. One even "doesn't see the point" of reading OMAAT.
To each, his own.
I second the advice on paying on time. Definitely setup autopay on all cards. A few years back I had a $3 charge on a card I rarely used and forgot to pay for 2 months. My credit score dropped by more than 100 points and has stayed below 800 ever since. Will probably stay that way for 7 years after the goof.
Ben doesn’t just pay “on time”, he pays before the statement even closes.
Everyone should pay “on time”. No one need pay before the statement closes.
“There’s one other trick here — pay off most of your credit card balance before the statement even closes.”
That’s a crazy level of Credit Score OCD.
Unless you’re getting a mortgage or car loan/ lease, the fluctuations in your score from month to month utilization changes are meaningless to your life. Why add an additional level of hassle beyond auto payment?
If you are headed for a mortgage, I can see doing that a month or two before. Otherwise, just chill.
Disagree. If you routinely charge $10k/mo and your total available is $50k your util is 20%. If you make your payment routine 3 days before statement date, instead of some other date, you're performing the same tasks, just at a different date. The benefit is a 0% util. Not sure it's as pointless as you say.
My fear of paying the card before the statement closes is that I won't get the points for the spending.
It makes no difference. Many card companies show you the points you earn per transaction, plus you could look at your total earned points vs. spend, if you wanted to verify with your own cards.
You will. Don't worry about that. It doesn't work that way.
Ben, that's an American thing. As told before, in Europe you can't have that quantity of CC's. At least in the country I live you can't? Which is Belgium. I have a big business and today I have 4 CC's, albeit all with a big Credit available because I can prove a big income on those banks. There is a thing here called National Bank, one that have to be consulted by every bank whenever...
Ben, that's an American thing. As told before, in Europe you can't have that quantity of CC's. At least in the country I live you can't? Which is Belgium. I have a big business and today I have 4 CC's, albeit all with a big Credit available because I can prove a big income on those banks. There is a thing here called National Bank, one that have to be consulted by every bank whenever you ask any bank to have Credit. Therefore I'm not sure your post is for great value for all OMAAT readers.
The points game is eminently an American hobby. The rest of the world is out of luck. Even Canadians cannot play. Blame it in your governments that ultra regulate the financial industry. I say this as an immigrant to the US who experienced what you are conveying before coming here. Free markets have problems but also offer amazing opportunities.
There is no connection to freedom here. This situation is partly attributed to smaller and weaker banks that failed to dominate the payment markets, unlike in France, Switzerland, and Germany, where larger banks predominantly manage payment systems.
As a Swiss covering Private Banking, I believe you also misunderstand what constitutes a free market. The US financial market is heavily regulated, and the US system is often described as "predatory" and "unfriendly" by liberal countries...
There is no connection to freedom here. This situation is partly attributed to smaller and weaker banks that failed to dominate the payment markets, unlike in France, Switzerland, and Germany, where larger banks predominantly manage payment systems.
As a Swiss covering Private Banking, I believe you also misunderstand what constitutes a free market. The US financial market is heavily regulated, and the US system is often described as "predatory" and "unfriendly" by liberal countries such as Switzerland or Singapore. For instance, US Americans are taxed based on their citizenship, not their residence. If you are unfortunate enough to inherit a US passport, you are obligated to pay taxes to a country with which you have no real connection. This is the antithesis of freedom.
Ben's advice here is largely applicable to Canadians as well. The system in Canada is substantially similar. Certainly the basic advice about having lots of cards, paying before statement date to reduce utilization, inquiries dinging score slightly and temporarily, average age of accounts, are all similar in Canada.
@ DenB
Agree, because US or Canada is about the same. But not here.
Note that TransUnion Canada keeps hard pulls on credit reports for 6 years instead of 2, but yes it's otherwise similar. https://www.canada.ca/en/financial-consumer-agency/services/credit-reports-score/information-credit-report.html