Credit Scores 101
Every time I tell people I use credit cards for points travel and for cash back, the first response I get is: “Doesn’t signing up for a credit card drop your credit score?”
So, I figured I would clear this up.
What is a Credit Score Used For?
Everyone in the United States has a credit score, which ranges from 300 - 850. A large number of individuals and institutions use your credit score to make decisions about you. Even if you are not looking to obtain a loan anytime soon, it is still important to have a good credit score. Landlords, mobile phone companies, and even potential employers look at your credit score. In fact, almost 50% of employers have used credit scores as part of their hiring process.
Crucially for anyone reading this blog, you will probably not be approved for some of the best credit cards out there without a good credit score.
How Your Credit Score is Calculated
Your credit score is calculated based on five factors, as you can in the image see above. Your credit payment history and the amount of money you owe both make up 65% of your credit score.
This is why I tell anyone who is interested in getting into points travel a very important rule.
Very Important Rule: Pay off your credit cards in full and on time.
You should treat your credit cards like a debit card. Credit cards have horrendous interest rates, and there is no way you can save money if you are paying off interest every month. Additionally, if you only pay off the minimum balance every month, you are actually hurting your credit score. If you do pay off your balance every month, however, you already have 65% of your credit score covered.
Essentially, your credit score will decrease by a few points, but after a few months it should increase. That small deduction is really the only downside. Unless you do not pay off your new credit card on time or in full, of course.
My Credit Score
Since I started in the world of points and miles, my credit score has actually increased significantly. I currently have ten credit cards, and my score is above 800.
I have to say this one more time - if you pay off your cards on time and in full, your credit score will not drop but in fact, in all likelihood, will increase. I know, it is a little counter-intuitive.
There is certainly a lot more that can be covered on this topic. If you have any questions or comments, please let me know and I will do my best to answer them.