Earning points and miles will always start with a credit score. Thousands of people play this game by carefully understanding and maintaining their scores. These people understand that the widely held notion that multiple credit cards means a lower credit score is false.
My score has actually improved since I began earning miles and hotel points. All because of an eventual "Ah-ha!" moment: how a good credit score has immense earning potential.
Whether you’re a beginner or frequent flyer expert, remembering your credit score is the foundation for any future earned miles. This post serves as a useful reminder of the components of a credit score, how to improve it and then profit from it via miles and points.
Step 1: Get your credit score
The first step is the easiest: find out what it is! CreditKarma.com is the most widely-used resource as the site is free and does not affect your credit score. It does this by using soft inquiries to the credit agencies - while not 100% accurate, it is considered a legitimate and accurate approximation. Also of note is that in the four years I have used the site, I have never encountered a security breach or any other issue. So feel safe providing your information.
Step 2: Understand the components
Here our journey gets a little more complicated. To understand the basics and why your score is where it is, you must understand the six components that count in the credit agencies' eyes:
- Payment History – The #1 most important aspect of your score. Pay your bills on time, every time, and you’ll receive an “A” in this category.
- Derogatory Remarks – These are negative marks on your credit, often resulting from outstanding debts, bankruptcies, etc. This is also often misreported by a credit bureau, meaning you’ll have a mark against you that is not accurate (think an old doctor bill that went unpaid). The good news is this is by far the easiest way to boost your score - if you find a mistake on Credit Karma, then fix it. And watch your credit score skyrocket upwards.
- Credit Card Utilization – This is the balance of your unpaid charges (i.e. shopping) versus your total available credit (i.e. the $10,000 you could spend on your credit cards) at the end of each month. This "utilization" is the most important part. For example, purchasing $1,000 on a credit card with a $10,000 credit limit would result in a 10% utilization rate ($10,000 divided by $1,000). The lower the percentage, the higher your score - aim to keep this under 2% for best results. Again, pay your bills in full and on time and you’ll receive an “A” in this category.
- Age of Credit History – This is one of the top reasons for denial of rewards cards and also the most negatively impacted by applying for multiple cards. But it is quite simple to track, as it is the total length of credit history divided by number of cards. For example, two cards – one opened today and another opened 10 years ago – is an average age of five years. But two cards both opened today would have an average age of a day. The longer your average age the better, hence why so many "new" cards can be detrimental.
- Total Accounts – Exactly what it means; how many credit accounts you have. But here is a surprising note: 20 to 25 open credit cards is not uncommon at all and can even lead to a higher credit score!
- Credit Inquiries – This is perhaps the most widely known credit score factor, but also the most overstated in terms of impact. When you apply for a credit line, the business will “pull” your credit report to determine if they should approve you. This is considered a hard inquiry (as opposed to a soft inquiry, like Credit Karma uses, which does not affect your score). While too many hard inquiries at once can raise a red flag to some banks, actively managing which banks you apply to can reduce this concern drastically. Each hard inquiry will likely reduce your score 2-3 points initially, a largely negligible sum and often made up for in increased credit (and, thus, lower utilization).
Step 3: Improve your score
I usually recommend readers to get above 680 before applying for rewards credit cards. But many credit cards I review need a better score or increased salary for good approval chances. This means that almost everyone should have an idea of how to improve, or at least manage, a good score.
Luckily there are some ways to substantially improve your credit score; these options being in addition to establishing healthy credit-habit routines like paying your bills in full every month.
- Pay down your balances to nearly zero. This is essential for any mileage earning strategy and decreases your debt to utilization ratio. Because the credit agencies report in month cycles, wait for 4-6 weeks with an extremely low balance - the next month's report and you should see a jump, all else held constant.
- Check if you have a derogatory remark, which will be reported by Credit Karma. If you have one, immediately call the credit bureau that has it listed (or all three) to find out what it is and how to remove it. Often it will be a mistake; other times an old bill that went unpaid. Regardless, remove it and watch your score rapidly improve.
- See if you can be added to your parent/spouse/friend account. By becoming an authorized user, you will often inherit another person’s credit history - whether good or bad though, I should note. But here is the best part: you don’t even need the card. Have your parent/spouse/friend receive and then shred the card, for all you care. You still reap the benefits. One note: this practice largely works, but can depend on the bank.
If all else fails, apply for a card on my credit card deals page to begin building credit (scroll to the bottom for credit-building cards). While not the best rewards value, there are still considerable deals in the mid-tier category.
Step 4: Start applying for cards
After all the time spent researching, reading, calling and more, it is time to be rewarded. Why is this considered to be another step though? Because once you start applying for cards, you need to keep your score steady (or even improving). Do this by always keeping in mind the principles of your score: pay off bills each month, actively track your credit score, etc.
This takes time, effort and often patience to apply for the right cards at the right time. It also takes experience, of which I have centralized into my tools page (I recommend the excel). All of this effort, however, culminates in a steady, excellent credit score and as many bonus miles as you can spend.
The time spent managing dozens of credit cards a year is worth it to me. I have earned anywhere between 10% to 15% return, on average, of each of my dollars spent since 2012, with an asterisk noting that all of this return has gone to often luxury travel (like this two-bedroom suite - it is too hard to pass up!).
But flying in fully flat beds, traveling to three continents with a single credit card bonus and never paying for flights is also something else: invaluable. Whether you are a wandering nomad or 24/7 worker looking for a break, the benefits of an improved credit score are worth working towards.