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So after I posted the post on “The Basics” the other day, I got several comments through email and Facebook about what effect credit card signups have on your credit score.  I think that’s one of the biggest impediments for people starting on what we call “travel hacking” – they’re smart people who have good credit and (rightfully) don’t want to screw it up.

Thus, it’s important to keep in mind the top 3 things about your credit score

  1. Your credit score is one of the most important assets you have – DON’T SCREW IT UP!
  2. Your credit score is one of the most important assets you have – DON’T SCREW IT UP!

Can you guess what #3 is? 😀 – it’s kind of like the top 3 things about selling real estate.

The credit bureaus go to great lengths to keep the formulas for calculating credit score if not secret, at least opaque.  That way they can sell you copies of your credit report to make money, of course!

But we do know that there are 5 basic factors in calculating a credit score – listed in descending order of importance, they are

  1. Payment History
  2. Amounts owed
  3. Length of credit history
  4. New credit
  5. Types of credit owed

So travel hacking (or at least the part we’re talking about here – credit card signups) has a negative effect on #4 (which accounts for 10% of your score).  But it has a POSITIVE effect on #1 and #2.  #1 – you’re making on-time payments to more accounts.  Think about it if you were lending money to a friend: would it tell you more if they had borrowed money from one person and paid her back?  Or if they had borrowed money twenty times and always paid them back?  #2 – this relates to the total amount of credit that you have outstanding.  If you owe $1000 and have a credit limit of $10,000, that is looked upon less favorably than if you owe the same $1000 but have an overall credit limit of $50,000.  Again, having more credit cards (higher total credit line) helps with this.

If you sign up for new credit cards, how does that affect your credit score?

To conclude this part, if you do it right, opening up several credit cards can have a negligible overall effect on your credit score.  This is doubly true if you and your spouse or partner both have good credit – that way you can spread out the signups.  The most important thing to remember (besides of course the #1 rule which is DON’T SCREW UP YOUR CREDIT SCORE) is to start small, and only do what you personally understand and feel comfortable with.

Next time, we’ll talk about (free) ways to monitor your credit score, and in what situations it does not make sense to open lots of credit cards

This post is part of our Beginner’s Guide – so if you liked this, and want to learn more – make sure to read the rest of the articles in the Beginner’s Guide

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