Surely getting a few cards and getting all these amazing points has to negatively affect your credit score…right? I already wrote about this a little bit in the Beginner’s Guide, but it’s probably one of the most common doubts and misconceptions about “churning” or getting credit card bonuses, so I thought I would make a full post about it here. Long story short – getting credit cards for bonuses will NOT destroy your credit score; on the contrary, it will probably help it. Here’s my score as an example. I didn’t start checking this particular site until after my first two cards so that initial data is missing, but I started at a 720 – so the initial “bump” from 720-755 is missing on this graph.
I’m going to cover two main questions to explain how a positive credit score impact is possible: 1) How does a credit score work? and 2) How will my score be affected?
How does a credit score work?
Most people know what a credit score is, but few know what actually defines your credit score (or what their exact score is). If you don’t know your score yet, I suggest Credit Karma. It’s free, it updates weekly, and won’t ding your score for checking it. I’m sure other sites are just as good, but I use Credit Karma to track my score and have had no complaints! Once you know what your score is, you can begin to figure out how getting cards might affect it. A credit score is basically a bank’s assessment of how likely you are to default, or spend all their money and not pay them back.
Every bank might have slightly different variations of this, but FICO describes the credit score basic structure as follows:
- 35% – Payment History. Pay on time, and banks trust you more with their money. This only requires paying the minimum payment, but you should always pay in full to avoid interest charges. Debt and interest completely wipe out any benefits from bonuses, so always pay in full!
- 30% – Credit Utilization. If you have a $10,000 limit and every month your ending statement is $10,000, it’s scary for the banks. You’re using every dollar they’ve given you! That puts them at risk. Utilization is measured as the total balance due on all cards divided by total credit limit across all cards. The magic number here is 30% – if your total balance is less than 30% of your total credit limit, then you’re fine. This is just a “snapshot” in time, meaning if you have a high 70% utilization one month, it doesn’t affect your score forever. If you improve your utilization the next month, then your score will bounce right back to where it was before. Tip: Pay off cards before the statement posts to keep your utilization low.
- 15% – Length of history / average age of accounts. If you don’t have much history, it’s hard for the bank to judge you. Longer history and older accounts makes you a better candidate. This is why we recommend keeping cards open that have no annual fee, so this will “anchor” your score higher over time. If you have 5 cards with an average age of 5 years and get one new one, your average age will drop to a little over 4 years. Not a big deal. If you have one card that’s 5 years old and get one new one, your average age will drop to 2.5 – much more significant.
- 10% – Recent Inquiries. These are sometimes called “Hard Pulls” or “Hard Inquiries” as well and happen whenever a bank, loan company, rental company, etc. “pulls” your credit file to see your score and either approve/deny you for something. If a bank sees you have just been asking for tons of credit, they are going to be a little suspicious and less likely to approve you. The effect of hard inquiries decreases after 3 months, stops being counted in your score after a year, and is dropped off your report completely after 2 years.
- 10% – Types of credit. Banks like when you have multiple types of credit (mortgage, car loan, credit card) so that they can see how well you do with different things. Once again, this isn’t a huge deal at only 10% of your score.
How will my score be affected?
Now that you know what makes up your score, let’s see what the effect of getting new cards would have on those aspects.
- 35% – Payment History. No effect.
- 30% – Credit Utilization. Positive effect. Here’s why: let’s say Mary consistently has a final monthly statement of $1000. If she only has one card, and the limit is $2000, her utilization is at 50%. Her balance itself isn’t big, but as a % of total credit available, it’s not the best ratio. If she gets one more card with a $5000 limit, and still has the same $1000 ending balance, her score is now balance ($1000) / total credit ($2000 + $5000), or ~14%. Even though the balance and purchasing behavior is the same, the credit limit increase from a new card actually is a huge driver in improving her score.
- 15% – Length of history / average age of accounts. Negative effect. The effect will depend on how high your score is and how many cards you have, as explained in the example above. In essence, getting a new (0 month) card will bring down your average. As the accounts get older, this aspect of your score will become better. Closed accounts also remain on your report and, somewhat surprisingly, continue to “age” on your report for 10 years.
- 10% – Recent/Hard Inquiries. Negative Effect. This is probably the biggest, but most temporary, negative effect of churning. As mentioned above, the effect decreases after 3 months and stops impacting your score. With that being said, it only accounts for 10% of your score – so it will never be a huge burden.
- 10% – Types of credit. No effect. If you previously had no credit cards, then this would actually be a positive effect, but that’s not the case for most people.
So, if 45% of your score (payment history and types of credit) is unaffected and 30% is positively affected, that means churning can only negatively impact 25% of your score. This explains why every single person I’ve helped so far has seen a positive bump to their score after their first card or two, and only temporary, moderate drops for the time period immediately following it if they continue getting 3+ more cards. Most scores follow the exact model of mine shown above. And since probably none of you will get 17 cards in 12 months like me, the “dip” in your score will likely be much less.
Many people have also asked, “Won’t closing cards ding me a ton though?” If there isn’t a no-fee version to “downgrade” your card to, and you don’t want to keep it, most people cancel. If you look again at the factors listed above, only two things could be affected from canceling: Average Account Age (but as explained earlier, that effect doesn’t occur for 10 years), and Credit Utilization. If you get rid of a card with a huge limit and keep your balance the same, your utilization might increase. If you manage your ending statement balances to keep your utilization ratio low, however, this shouldn’t be a problem. You can also move credit limit from one card to another card (from the same bank) before you close it. Some people say, “But won’t the bank itself not approve me anymore for other things? Won’t I have made them mad?!” Unless you closed the account with debt on it and never paid them back, the answer is no. Speaking again from personal experience, I got the Delta Amex card in summer of ’14 before I knew about churning. I used it to get points when I bought Mary’s ring, and it served me great that first year. I didn’t want to pay the fee again, so I closed it. Two years later, in Fall of ’16 when I had already been churning for 5+ months, I signed up and was approved for 4 more Amex cards. Banks really want your business – and a closed card on your report won’t ruin you at all.
If you want to get a mortgage or auto loan in the next 6 to 12 months, I wouldn’t sign up for new cards. If by any chance your credit score decreased, it might raise your interest rate on the loan and end up costing you more money. If you aren’t getting a mortgage or other type of loan, then churn away. If you keep paying on time, manage your utilization effectively, and stop a year before you need a loan, then you can reap incredible benefits along the way, travel to your heart’s content, AND end up with a great score as a result!
As always, comment below with any questions. Don’t be afraid to ask – more people probably have the same thought as you, and having them in one spot can help tons of people!