Consumer Reports On Credit Scores & Credit Card Bonuses

The standard personal finance magazine advice is to apply for as few credit cards as possible, ostensibly to keep your credit score high. However, a recent Consumer Report article which tries to make the same case, actually ends up making a better case for applying for a steady stream of credit cards, especially when they are paying you big bucks to do so. Let’s break down the article section-by-section.

How many cards are too many?
Contrary to popular belief, having a lot of credit cards is not detrimental to your score. That’s because one component of the scoring formula is the ratio of balances to credit-limit utilization. The more available credit you have relative to the amount you charge each month, the higher your score is likely to be.

Here, if you have more cards, or at least higher credit limits, the high your credit score will be. Your credit score will also be more resilient, say, if you make a large purchase or spend more than usual on vacation.

Should I apply for several cards?
Your score can be affected by any new credit issued and the number of recent inquiries on your report resulting from your applications for new credit. FICO usually excludes inquiries that show you’re rate shopping for college loans, auto loans, or mortgages, but not credit cards. Every credit card you apply for will be considered a hard inquiry on your credit record; inquiries remain there for 24 months and could affect your score for the first 12.

If you have a lengthy credit history, such inquiries shouldn’t affect your score much, if at all. But if your credit history includes only one other account and you open a new one, the length of your average credit history will be halved and your score will probably drop.

Again, we see that if you only have a few credit cards, then your score is susceptible to dropping with just one new credit inquiry. However, if you have a bunch, then your score is again more resilient. As for the actual effect, a variety of reports from various credit forums has shown me that the effect of a hard inquiry lastly only for about 6 months, and goes away quickly after that. I personally apply for a round of cards every 6 months in response. Note the article carefully dances around this by saying it “could” affect your score for up to 12 months.

Should I keep my oldest card?
It’s a common belief that you should never close the card you’ve held the longest. (The length of your credit history makes up 15 percent of your score.) But credit bureaus usually leave closed accounts on your file for 10 years, so your long-held cards will still be factored into your score after you ditch them. If you’ve obtained other credit accounts over the years, closing one card shouldn’t have a big impact unless it represents a significant portion of your available credit. In that case, closing your old card could hike your balance-to-credit ratio and lower your score.

Yet again, counter-intuitively, by applying for a lot of cards regularly over the last few years, closing cards does not significantly affect my credit score. My average age will always be pretty long. Of course, I still try to keep my oldest cards open.

When should I ditch a card?
I’ll just override Consumer Reports on this one. You should ditch a card whenever it saves you money. If a card charges an annual fee and you don’t think the benefits attached are worth it, then you should cancel it. If your interest rate is too high and you can do better elsewhere, cancel it. Simple as that. If you applied for a new card with a nice bonus and they denied you saying you have “too many cards with us”, then call them up and offer to close your old card, and chances are they’ll be happy to oblige in order to keep your business.

Comments

  1. Alexandria says:

    “But credit bureaus usually leave closed accounts on your file for 10 years, so your long-held cards will still be factored into your score after you ditch them.”

    I personally close any card I am not using. I usually keep one regular card open, and one backup card (both with best ongoing rewards). I open and close a handful of one-time reward cards every year. I couldn’t imagine keeping any other cards open and keeping track of them. No missed fraud. No surprises. I personally think it just opens up more trouble. (For reference, I never had any fraudulent charges on any of my cards until about 3 years ago – and now it happens on average once a year. I just don’t pay enough attention to old/unused cards to be sure I’d catch anything like that. Some companies are frequently changing credit card terms, etc. – again -one more thing I don’t want to keep track of).

    Anyway, besides my paid-off-monthly cards and a mortgage, I have nothing else on my credit report. I have had no problem maintaining an 800+ credit score, even with virtually no open credit history. (Where I am at for the moment – even my mortgage was recently refied). I’ve always felt that the fact that closed cards stay on your report for 10 years carried far more weight than worrying about *length of open credit history.* Has absolutely been my own experience.

    Anyway, I have always found it amazing the hoops people jump through in the name of FICO. I’ve never played the game – I don’t see the point. The -0- late payments in my history obviously count for most my score. The mortgage helps. Just about everything else I have done *wrong.*

  2. I’m sort of with Alexandria in that I like to close cards I’m not using, but in particular I’m on a spree to close cards that I don’t have easy access to my account balance outside of mailed statements.

    This thought stemmed from a mailing I got informing me of changed terms on a card that I had completely forgotten I still had. I got it and recognized the last four digits, but was surprised I’d never actually closed it. I hadn’t actually had a physical version of this card for years, and hadn’t received a statement concerning it in years either. It also surprised me that the letter had been mailed directly to my then less than two month old new address, so they were obviously keeping up with my mailing address somehow (maybe all VISA cards get updated somehow? I don’t know).

    I didn’t even know the full account number when I called to inquire about it, and had to go onto Google maps to remember the address I would have had to give the woman some way to authorize me to do anything with it over the phone.

    It simply freaked me out that I had no way of knowing anything about this account (including the fact that it was still active) outside of snail mail from the bank actually getting to my mailbox.

    I closed that card on the spot and currently only have one more outstanding card that I can’t access online in some fashion. This other card I still actually have, but like the other haven’t used in forever and haven’t received a paper statement in forever (I do know I never closed it though).

    I’ve never kept a ton of cards in any case, I’m just not inclinced to want to keep up with multiple balances on credit cards.

  3. Richie Rich says:

    How does FICO look at credit utilization? Is it on a card by card basis or your total credit utilization against your total credit available?

    Also, with mint not allowing credit cards to be used to purchase coins as of 7/22, what are some different ways (besides the amex gift cards) to spend the required amounts for the credit card bonus?

  4. @Richie Rich: Amazon.com, Costco, Walmart, IKEA, and Home Depot are among my wife’s favorite ways…

  5. To Alexandria and Sean,

    You mention worrying about fraud and keeping track of balances as reasons not to keep old cards. If you are keeping an old card around for the history of an account, to keep utilization lower or for whatever reason; if your not using the card it should have no balance and thus make it easy spot any fraud. What I do is call the CC issuer request a new card number and when it arrives activate the new card and stick the card in my lock box. It may be naive but i figure that if CC issuer and I are the only two who have the card number then the risk of fraud or the number being leaked in a data breach is greatly reduced and if i get a bill then i know something is wrong.

  6. You have to be careful when trying to hold on to old cards to watch for inactivity cancellations. CapitalOne and some others banks will cancel your credit card after 6 months of no activity. They often do this with no warning and no appeals process.

  7. If you have a card with an annual fee that is not worth it, the issuing bank will often be happy to transfer you to one of their no annual fee cards with fewer perks but the same credit limit rather than losing you as a customer. That way you can keep the credit limit that the card gives you to help your score.

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