We all know that the huge hauls of 50,000, 75,000, and 100,000 miles are typically only to be had by credit card sign-up bonuses. Unless of course you happen to get a purchase that amounts to 83,871 American Airlines Aadvantage miles for a $5.00 Verizon Wireless phone accessory honored. In addition to the huge sign-up bonuses, rewards credit cards also help our family bring in lots of points just by everyday use. There are dozens and dozens of rewards credit cards out there that tempt my family (and many others out there) to sign-up in order to get the huge sign-up bonuses and benefits that come with them. It is a careful balance to take advantage of several of those credit card sign-up bonus deals each year in order for my family to be able to “afford” to travel, and yet still protect our credit rating.
There is no question that applying for multiple credit cards in a short period of time will likely hurt your credit score. Yes, increasing the amount of credit you have, and thus likely decreasing the percentage of your credit utilization, may help your credit score in some situations. However, in the long run, “churning” credit cards will have some negative effect on your credit score. I am not a credit score expert by any stretch, but I do know the importance of your credit report and credit score. Your credit score is important if you want to be able to take advantage of multiple credit card offers each year, but of course it is also important to many other aspects of life as well, which I am sure you already knew!
When I first started to apply for credit cards for the sole purpose of gaining miles and points, I knew that it would negatively effect my credit score, but I didn’t have a good grasp on how significantly it would effect my score. Frankly, as long as I was getting approved for cards I’m not sure that I really cared! To an extent that is still true, but I think it is important to have a better understanding of exactly how it is affecting your credit situation. When I applied for our second mortgage about a year ago (darn you bad market for being so crummy that we can’t sell our first house, so now we have mortgages on two houses!!), my credit scores from the three credit reporting agencies of TransUnion, Experian, and Equifax were in the low 800′s and very high 700′s. Since that time I have obtained a second home/mortgage, bought a new car, and opened 6 or 7 new rewards credit cards.
My credit scores with the three reporting agencies have dropped about 50 points in the last year as a result of those events. I have not been late on a single payment, my debt to credit ratio is very low, and I have kept my oldest accounts open and in good standing. Of course, it is impossible to know what amount of that credit score drop is solely from the new credit cards and what proportion is from the mortgage and new car.
I wanted a concrete example of what a single credit card application would do to my score, so I saved my score from right before I applied for the super American Express Starwood Preferred Guest 30,000 point offer, and compared it to my credit score a few days after I applied for that card. Here is what I found:
Pre-Starwood Credit Card Application:
I used CreditKarma.com and MyFico.com on free and/or cheap trials in order to see where my credit score stood. There are tons of different companies that offer free or reduced cost credit scores. You can get your credit report from each of the three bureaus for free once a year from www.annualcreditreport.com – but your credit score is something that is a little bit harder to obtain for free. Though it can be done!
I’m not sure if I was surprised to learn that my credit scores had dropped about 50 points in the last year or not. I know I wasn’t thrilled about it, but I also wasn’t too upset. I knew it would be lower than it was a year ago, and I also have no large financing needs coming up, such as a mortgage. If I did, I would not be applying for credit cards in anywhere near the quantity that I am. I know that I apply for nowhere near the number of card that true “churners” do!
I laughed a bit to see the “negative factors” influencing my score on the super official looking credit “scale”. New accounts, you think?!
Of course, this information did not dissuade me from applying for the Starwood card, but it did at least make me think about whether or not it is worth it first.
Post-Starwood Credit Card Application:
Two or three days after my Amex Starwood Credit Card application, I checked my TransUnion score again on Credit Karma and found this as the result.
If you remember above, my TransUnion score was 766 just prior to the Starwood application, and is now 753. For those bad at math, that is a 13 point drop in less than a week. Ugh! The only thing that really changed during that time was the Starwood Amex application. Of course, not every application drops a score in this manner. There are a large number of factors that influence credit scores. I have a theory that my scores are dropping more right now as my average account age is now less than 5 years due to all of the recent applications. If I were older and thus had a longer credit history, I’m not sure the effect would be this large. Of course, as a reader pointed out, the inquiry is likely the only thing that was on my application that quickly. The actual account itself usually takes much longer to show up.
I have no intent to stop applying for credit cards, but I am going to be very cautious about what offers to apply for. My credit score is just about out of the “excellent” category. I don’t mind fluctuation within the excellent credit category (kind of like some weight fluctuation, but you fit into the same jeans!), but I am not thrilled about changing categories. I had already planned to cool it on applications for the rest of the year, but now that is really the case. I plan to have one more application between now and the end of the year, but otherwise I am just going to let time work its magic. As they say, time heals all wounds. That is true with credit scores, too!
I certainly don’t intend for this info to scare you away from applying for rewards credit cards, but I do highly recommend that you become informed about your credit score and keep an eye on it from time to time. I think that the Frugal Travel Guy says it best when he states, “Your credit is your most important asset.” I couldn’t agree more. With that being said, here was the outcome of the American Express Starwood credit card application……………
Woohoo! Instant approvals always feel nice.
What effect has applying for rewards credit cards had on your score? Do you check your score? What services do you use to keep an eye on your score? I’d love to hear other experiences! As always, thanks for sharing!