Do you know your credit score? 59.1% of Americans don’t, according to a 2015 LendingTree survey. Kind of crazy considering the huge impact it has on most people’s ability to make large purchases. You may be one of the few who is able to cash flow a new car or buy a home without a mortgage, but that’s just not true for most folks.
Your credit score is made up of a few different aspects. The one that most people know about is payment history. Everyone knows you should pay your credit cards and loans on time, but if you don’t, you not only get hit with a late fee from the lending company, your credit report gets a mark on it too. Too many marks can lower your credit score.
Length of credit history is another factor. This takes into account your oldest account, newest account and an average age of all your credit accounts. It can also be influenced by how long it’s been since you’ve used certain accounts.
Different types of credit also positively affect your credit score. If all of your previous credit was credit cards and you apply for a car loan, you may find that after a few on time payments, your score has gone up, because you diversified your credit.
On the flip side, obtaining new credit can sometime lower your score, at least temporarily. If you’ve only just begun to build your credit, opening several new lines of credit at once can impact your credit score via hard inquiries, but it also will lower the average age of your credit history by a significant number, creating a credit score double whammy. Inquiries stay on your credit report for two years, whether you are approved for the line of credit or not. These inquiries usually have a small impact on your credit score, it’s when they effect the other aspects like age of credit history that the impact can be more noticeable.
Another aspect of your credit score that a lot of people know falls under credit usage – for the most part, we all agree it’s not good news to max out your credit cards. The way this affects your credit score is through your credit utilization ratio on revolving accounts. The lower this number is, the better. If you have $10,000 available to you in credit (on one or multiple cards) and are using $9,000, that’s 90% of your credit and that’s a pretty high percentage that can lower your credit score. If you only have $1,000 of that credit used, it’s merely 10% and not likely to have a negative impact on your credit score.
A lot of people with high credit scores and good credit card practices still hesitate to start churning credit cards for the rewards because of the belief that it can negatively impact your credit score. If your credit history is more than a few years old, it’s not only possible for you to churn credit cards without dropping your credit score, it may improve it.
The hard inquiry only has a minor effect on your credit report. Lowering your average age of credit may cause a small dip, but increasing your accessible credit will lower your credit utilization, which factors heavily into your credit score.
Speaking from personal experience, I can say that I’ve churned 6 cards between 2014 and now. When I began, my credit history average age was 8 years and my score was just over 750. My credit history is now down to 3 years and CreditKarma flags it as Poor, but my credit utilization has skyrocketed. Previously, I had just under $10,000 in credit available to me and now it’s closer to $60,000. Most importantly, my credit score hovers right around 810 these days.
It’s important to note that if you don’t regularly pay off your credit cards on time, credit card churning is not for you. The interest rates on these cards are much higher than other credit cards and the rewards are just not worth it if you can’t manage to carry a zero balance at the end of each month.