I was at a backyard gathering yesterday and, as usual, was telling my friends about the virtues of points collecting. At one point I mentioned I typically go through 4 or 5 credit cards a year and one person’s reaction was somewhat shocked and she exclaimed “how does that affect your credit?”, I presume because she assumed that would negatively affect my credit score. I realized right then what I was going to write about in my next blog post, because I think there’s a real misconception about how credit scores work.
Most folks, I imagine, believe the best way to good credit is to have good income and one credit card that you pay off regularly. Not so.
How Many Credit Cards is Too Many?
It might surprise my friend to know that my 4 or 5 credit cards each year is actually very conservative among people who churn credit cards. It is not uncommon at all for some people who aggressively collect points to have over 20 credit cards at one time.
Because of the way credit scores are calculated, getting more credit cards will in most cases cause your credit rating to improve. This is because one of the most important criteria used in calculating your credit rating is “credit utilization”. Credit Utilization is the ratio between how much available credit you have and how much of that you’ve spent.
Aside from your payment history, credit utilization is the biggest factor in determining your credit score.
From the perspective of the credit card companies, the reasoning is sound. People who get in trouble with credit typically will spend until the limit runs out, so someone at or near that limit is a far greater risk of default than someone who pays their balances off regularly.
Let’s say you have one credit card with a $5000 limit and you’ve been carrying a $2000 balance on for a few months. That’s 40% utilization. Now, you get another credit card with another $5000 limit. You now have $10,000 in available credit but you still only have a balance of $2000. You’ve just lowered your utilization to 20% and have improved your credit score! Congratulations!
The magic number for the credit bureaus is 30%. Anything above that utilization will start to negatively affect your score and anything above 50% will severely affect your score.
Now, let me be clear. Despite a 30% credit utilization being hunky dory for your credit score, if you’re collecting points you never want to carry any balance on any of your credit cards. Credit cards that earn the most points have high interest rates and if you’re paying interest that’s money that’s not earning points.
Obviously, life happens, and sometimes you have to spend more than you can pay off right away and occasionally there will be times when temporarily carrying a balance is necessary to meet an excellent points earning opportunity, but these instances should always be the exception and quickly paid off.
If you are not in control of your spending and adding more credit cards would mean adding more debt, this game is not for you.
Making Your Payments
It goes without saying (I hope) that you must pay your bills on time. If you miss payments and end up in arrears, your credit card point collecting days are over. This extends beyond just the cards. Anyone who ends up in arrears on anything that reports to the credit bureau will see their credit score nose dive and you simply will not be able to play this game effectively. So sad.
If you’ve never done so, you should pull a copy of your credit report from both Equifax and TransUnion and look at it. You may be surprised by what’s on there. I know I was surprised to find that my cell phone and Internet provider report my payment history to the bureau.
Another thing worth mentioning here is that the credit card companies report a snapshot of your account at a point in time, which may not correspond to your bill payment date. So if you have a $10,000 total credit limit and pay it off every month in full, you still may be exceeding 30% utilization on your report if you’re spending a lot in a given month. Sometimes it can be helpful to pay your credit cards off more than once a month. We like to pay all our balances every payday (twice a month).
Know When (and when not) to Cancel Your Credit Card
Credit card companies, above all, want to make money. They make the most money from people like most of my friends, mature adults who have one main credit card that they’ve had for 10 years or more, never go in arrears, faithfully paying their annual fees and who, ideally, carry a balance for months at a time at 19% interest. Cha ching!
Less profitable are young adults with limited credit history and folks like…, well, like me, who are often only interested in the sign up bonus and moving on to the next card once that has been obtained.
One of the ways credit bureaus try to weed out the card flippers and the risky young punks with limited history is to look at the “average age of account” or AAoA. Obviously, the credit card points game requires churning many cards which would negatively affect your credit score, unless you have some credit accounts with long histories to keep the AAoA high.
So, remember this rule: You need one or two “keeper cards” that you never cancel. Ideally those cards should be ones you’ve held for a long, long time and don’t have an annual fee.
As I discussed in one of my first blog posts, TD and CIBC are great for keeper cards because you can “product switch” them to a no-fee card without closing the account. This has 2 benefits, first, you can keep it forever at no cost, and second, you can periodically switch it back to a points earning card to get repeated sign up bonuses and “first year free” promotions. What’s even better, is that because you’re not actually applying for a new card when you product-switch, you don’t incur an inquiry to the credit bureau. Sweet!
At some point though you have to cancel some cards. This game doesn’t work if you have to pay annual fees renewals on all the cards. Aside from the “keeper” cards, you’ll generally want to avoid holding the card for more than a year to avoid renewal fees. Some cards, like the Amex Platinum have unique features worthy of annual fees for some people, but you generally you’ll want to bail before the fee hits.
It’s always best to hold any card a minimum of 6 months. I prefer a full year for most cards, cancelling either just prior to the renewal date or just after, depending on the card. Amex will refund a renewal fee if you cancel within a few weeks of the anniversary. The theory behind this strategy is that the algorithm may use <1yr and >1yr as a cut off for better scoring.
I hold the Marriott Bonvoy Amex for 14 months, cancelling after I receive the free-night certificate because the annual fee of $120 is a bargain for a free-night certificate I can easily use on a $300-$400/night hotel. That’s nothing to do with Credit Scores and everything to do with saving money.
Know How Applications Affect Your Credit Score
Every time you apply for credit the request creates a “hard pull” record on your credit file. Request credit too many times in too short a time and the credit bureaus will suspect something is up and lower your credit rating. The very aggressive credit card churners will make multiple applications with the same company on the same day because the computers won’t re-pull if they already have have a credit check for you that day. You’re probably not going to need that level of sneakiness. Just follow a few simple guidelines.
First of all, take advantage of Product Switching. For example, switching from a TD Aeroplan Visa to a TD Cash Back Visa or visa versa. This gets you a new type of account but keeps the same account number and doesn’t require a hard pull on your credit rating.
Remember that renewing your mortgage with the same lender you currently have doesn’t create any new hard pulls,. Shopping around for other mortgages does. If you’re looking to shop around for a better mortgage, hold off on the credit card thing for a while. If you just renew, carry on!
Alternate cards that pull from different credit bureaus. For example, TD Visa requests pull from Equifax while Amex card requests pull from TransUnion. So if I have applied for a TD Visa, for example, and a month later I’ve hit my Minimum Spend Requirement (MSR) to get the bonus points, I might now look to Amex for my next application.
If you’re a couple, even better. You can alternate not just between banks that use different bureaus, but between people too. Doing this you could potentially get a new credit card each month while each person’s Equifax bureau would only see one hard pull every 4 months. Most credit applications offer qualifications based on household income so even if only one of you has the main income, you can both play and take advantage of alternating credit applications and earn referral bonuses between each other!
My rule of thumb is that an individual should wait a minimum of 3 full months between applications with the same bank. If a couple of killer bonus deals come up at the same time at the same bank, and you want to get both within 3 months, that’s probably fine, but I wouldn’t make a habit of that.
Some banks will limit how many times you can apply in a given time. My strategy has never hit any limits like that. I just alternate between banks and which person applies, getting one card at a time for the most part. We both spend on it until we have the bonus and then move to the next. About 5-10 cards a year between us, with varying bonuses, earn us about 300,000-500,000 Aeroplan points a year depending on the year and what cards we’re playing. Both our credit ratings hover between 780-820. Immediately after getting a new card they’ll dip to the low end of that range and then after a few weeks will rise again to the higher end.
Review Your Credit Report
Have a look at both of your credit bureaus. It’s always a worthwhile thing to do periodically whether you play the credit card points game or not. If you have a Scotiabank account, you can view your TransUnion report for free from right inside their online banking website. There are free credit report sites, such as CreditKarma I know a lot of people use, although I’ve not used that personally. You can also pay for access directly from Equifax.
As you can see, this game does not hurt your credit if you play it right. In fact, my credit score improved dramatically when I started doing this.