Understanding How Credit Scores Work
Before diving in and applying for tons of credit cards right out of the gate, it’s important to understand how they work. The reason credit card companies are able to offer such lucrative sign-up bonuses is the majority of Americans run a balance that they can’t pay on time and live in debt. Do not let this be you. It’s absolutely critical that you pay off your balance IN FULL, so that you’re never paying interest. Create a spreadsheet for each credit card you apply for (even if you get rejected). Keep track of the annual fee, date you applied, statement close, signup bonus, etc. Turn on auto-pay if it helps, but you need to be vigilant and make sure you are ALWAYS paying in full.
Impact on Credit
It’s important to understand how your FICO score is calculated and why getting a bunch of credit cards over time and paying in full should increase your score.
Payment History 35%
This is the most important factor that makes up your FICO score and entirely in your control. Pay your card in full every single time. If you can’t pay, don’t put it on a credit card. Period.
Amounts Owed 30%
This is your overall credit utilization and the second biggest factor. If you have $150,000 of credit and are using $130,000 of that, this might signal that you are overextended and miss or make late payments.
Length of Credit History 15%
This takes into account the age of all your accounts, newest, oldest, and the last time each account was used.
Credit Mix 10%
Your FICO score will take into account credit card loans, car loans, mortgages, etc.
New Credit 10%
Opening up too many credit cards at once without a long credit history could potentially signal a greater risk for lenders
Takeaways:
The first credit card you ever get should be one that you never close. Make sure you have a few charges on it each year to keep it open forever. This will help establish your age of accounts.
Always pay each card in full, never carry a balance!
If you open credit cards and pay in full each month, over time, your credit score will increase.
The next few public posts will cover Chase, Amex, and Citi and more rewards programs, and which cards are best for each bank.