Archives for December 2011

I’ve been taking advantage of credit card bonuses and rewards for over 10 years now, earning thousands of dollars in perks while paying zero interest. I can honestly say that sign-up bonuses have never been larger than today. My rule used to be that I would only apply in exchange for at least $100, but now cards with $500 bonuses have been around for several months. I basically paid for all my holiday shopping with them!

A common reader question is – how does opening and closing all these cards affect your credit score? I’ve answered parts of this question here and here, but here’s the all-in-one answer.

Credit Score Basics

Credit scores come from proprietary mathematical formulas, the most popular one being Fair Isaac (FICO). The input is the history and data from our credit reports. The output is a numerical prediction of our creditworthiness. Since we have 3 different credit reports (Experian, Equifax, Transunion), we have 3 different credit scores. They’ll never reveal all the ingredients to the secret sauce, otherwise they’d have nothing to sell us. Thus, we must make do with what we have. FICO has released this breakdown for us, along with many other collected details over time:

Effect of Opening New Credit Cards and/or Closing Existing Accounts

35% On-Time Payments. Not surprisingly, the biggest chunk of the score is your record of timely payments. If you pay your bills, you’re likely to… keep paying your bills! Briefly, anything 30-days late or worse can show up here, although a 60-day late or 90-day late is even worse. If you just barely miss a due date and pay it off within 30 days, it shouldn’t show up here. This factor has nothing to do with opening or closing credit cards.

30% Capacity Used. This refers to how much of your available credit you are using, also known as utilization ratio. The lower the better. Being maxed out on all your cards is obviously not a good sign. Utilization ratio is tracked both on an overall level and on a per card level. For example, having five different cards with a $1,000 balance each and $10,000 credit limit each (10% ratio x 5 cards) is better than having 4 cards with no balance and one card with the $5,000 balance (50% ratio on 1 card).

In the long run, having more credit cards would be a good thing as it should mean more available credit and a lower utilization ratio. For the same reason, you should never close a credit card unless not doing so would cost you money. You want to keep all the available credit you can.

15% Length of Credit History. The longer your credit history, the better. Both the age of your oldest account and the average age of all your accounts are tracked. Continuously opening new credit lines will thus hurt your credit score. At the same time, having a lot of old cards can “anchor” your average account age as well. If I already have 20 cards averaging 8 years old, adding another new credit card won’t make that average budge hardly at all. Recently, I learned that closing a credit card actually has no effect on your average age of accounts or credit history length. The closed account will stay on your credit report for 10 years.

If you have “young” credit history, you’ll need to balance the desire for new accounts (which will one day be old accounts) with how good your other factors currently are to keep a good credit score. Another strategy is to be added as an authorized user on someone else’s account with a long age. (They took this away for a while due to abuse, but brought it back. Just make sure it’s legit, for example with your spouse/partner or parents.)

10% Types of Credit Used. We’re getting to the lesser factors. How do I know? This factor refers to the mix of different credit accounts out there – revolving credit like credit cards, retail accounts (store cards), installment loans like auto loans, and home mortgages. Having a greater mix is better. However, I have never had a store card, auto loan, or a mortgage on my credit report, and my credit score has remained excellent. You definitely don’t need all of these types to have a good credit score.

Now, I do think it is a good idea to have at least some form of credit to show that you can handle the idea of borrowing something and paying it back. A credit card allows you to do this within the monthly grace period without paying any interest.

10% Past Credit Applications. This what everyone worries about, but it’s again we see it is only a 10% weighting. This factor makes sense though, as applying for a lot of credit in a short period of time is an indication of financial troubles. Therefore, you should be very careful with what are called “hard” credit inquiries. Hard credit inquiries (“pulls”) are usually from loan applications (asking for more credit). Soft credit inquiries occur when you are just checking your own credit score, or when other financial companies check your credit history as identity verification or for pre-approval offers (here, you didn’t ask for it).

Hard pulls affect your credit score negatively for a temporary period of time. For mortgage and auto loans, there are special accommodations by FICO for “rate-shopping”; All hard inquiries within a 14 day period for mortgages or auto loans will only count as one inquiry.

In regards to apply for new credit cards, it’s difficult to know the effect of a hard inquiry by itself, as a new credit card account will also affect the other factors above (average age of accounts, credit limits, utilization ratio). For someone with a longer credit history, a new credit card application will have little effect. For someone with zero credit cards, it will have a larger effect. The general consensus is that each hard pull knocks about 3-5 points off your credit score, and the effect decreases as time passes – after 6 months the effect is reduced, and after a year it is gone. The recording of inquiries does stay on your report for 2 years.

Takeaways

1. For a high credit score, the most important things to do are to pay your bills on time and not use all of your available credit limit. Don’t lose sight of this.
2. Applying for new credit cards will affect your score negatively for the short-term, with the effect going away over time and gone in a year. However, that doesn’t mean they aren’t precious. Only apply if it’s worth it through lowering your existing interest rates, upfront bonuses, cash back, or travel rewards. Hard pulls are the same as cash for me!
3. Never close an existing credit card unless you are avoiding a fee or in exchange for something worthwhile (like a mortgage approval). Closing an account never helps your score, but only really hurts if it makes up a huge chunk of your existing credit limit.

Based on my own experiences, my personal choice is to limit myself to about 3-5 credit cards per rolling 6-month period (more when there are good offers and less when there isn’t). My primary concern is not really the credit score, but more the fact that individual issuers might not approve me just due to the inquiries even though my score is fine. I’ve scored over $2,000 in bonuses the last year alone, and that’s not even including my wife.

p.s. It’s not FICO, but now you can get your free credit scores with no trial periods from all 3 major credit bureaus. Tracking them regularly can alert you to significant changes in your reports.

NavyFed Credit Union has a limited-time promotion going on until Sunday, December 11th where if you do a balance transfer from an external financial institutions to your existing Navy Federal card, you’ll get a fixed 0% promo APR for 12 months with no balance transfer fee.

Membership eligibility for NavyFed is primarily restricted to military personnel including Army, Marine Corps, Navy and Air Force – including retirees and family members – but also include some civilian employees in Department of Defense. From the “existing” wording, it doesn’t appear that this applies to new card applications.

December 11th is Balance Transfer Day. It’s also your opportunity to save big! When you consolidate credit card balances from other financial institutions onto your existing Navy Federal card, the savings really add up. Get a 0% fixed promo APR* on balance transfers for 12 months. After that, your current standard variable purchase rate applies. And you’ll save even more because we don’t charge a balance transfer fee. You pay absolutely nothing—unheard of anywhere else!

Well, although it is indeed hard to find a no balance transfer fee 0% APR offer these days, it’s not “unheard of anywhere else”. Last month, the Chase Slate® also came out with 0% introductory APR on both balance transfers and purchases for 15 months with $0 balance transfer fee and $0 annual fee. All you have to do is initiate your balance transfer within 60 days of opening the account.

Either way, both are a good opportunities to lower the interest rate on your existing balances and accelerate that debt-free payoff.

“Disclaimer: This content is not provided or commissioned by the issuer. Opinions expressed here are author’s alone, not those of the issuer, and have not been reviewed, approved or otherwise endorsed by the issuer. This site may be compensated through the issuer’s Affiliate Program.  “The responses below are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser’s responsibility to ensure all posts and/or questions are answered.”

(Update 2: I’ve been notified that 12/22 may be the last day to apply for this $500 gift card offer from the Citi ThankYou Preferred card. The promo details remain as noted below, but I should point out that the Citi ThankYou Premier Card is also offering a bonus worth 50,000 points = $500 in gift cards. Learn more about the Premier card offer here.

Briefly, the Premier card allows you to get a 33% bonus when redeeming towards airfare. And it’s easy to use! Prices are the same as Expedia, and you can mix cash and points when redeeming. That makes 50k points with a Premier card worth $665 in airfare. The spending requirement for the Premier is lower as well. However, while the Premier has no annual fee the first year it is $125 for subsequent years, while for the Preferred card there is no annual fee period. Decisions, decisions.)

The Citi ThankYou Preferred Card has upped their game with a 50,000 ThankYou Point bonus broken down into two parts: You get 25,000 bonus ThankYou Points after $5,000 in purchases within 6 months of account opening, and you get an additional 25,000 bonus points after another $5,000 in purchases are made within the next 6 months after that. You do not need to qualify for the first 25,000 points to be eligible to earn the second 25,000 points. See below for details on how this is worth $500 in gift cards, airfare, or a check towards your student loan or mortgage. No annual fee.

This offer is both better and worse from their last 50,000 point promo back in June. The required spending is higher, although spread out over a much longer period. You basically have to spend $5k within 6 months twice, for an average of $833 a month. However, the last offer was for the Premier card with a $125 annual fee. This Preferred version has no annual fee.

ThankYou Point Redemption Options

Here’s a summary of your best values for ThankYou points, in case you don’t want to slog through all the many redemption options at ThankYou.com. In general, it takes 10,000 ThankYou (TY) points to redeem for a $100 gift card to retailers like Gap, Banana Republic, Barnes & Noble, Bath and Body Works, Bed Bath & Beyond, Cabelas, CVS Pharmacy, Kohl’s, Land’s End, LL Bean, Sears, Lowe’s, Home Depot, Staples, and Walmart. Bolded are my favorites. So with 50,000 TY points, you could get five $100 gift cards from different stores.

Want something closer to cash? For a check mailed to you, it costs 8,000 points for $50. For a statement credit, it’s 7,500 points for $50. A check mailed towards your mortgage payment or student loan (made out to your lender) costs 2,500 points for $25. This works out to 1 cents per point. Otherwise, it may be better to redeem your points for a Walmart gift card and then sell it for cash at a site like PlasticJungle.com that offers you 90 cents+ on the dollar. I just checked, and a $500 Walmart gift card would net you $455 in cash or $477.75 in Amazon gift certificates.

Now let’s look at the advertised airplane ticket option. A good question is whether a flight booked through the ThankYou Travel Center costs the same as through any other travel site like Expedia, Orbitz, etc. I have some old ThankYou points lying around, so I went to the redemption site and found that the prices are very closely aligned to what is offered at sites like Expedia.com. I did a few quick searches for random flights, and the cost of the flight matched up with the cost in points in a 100:1 ratio. For example, the exact same flight below that cost $360 including taxes and fees on Expedia would cost 36,000 TY points. ThankYou Travel Center screenshot:

Expedia.com screenshot:

Citi couldn’t stay way, given all the other $500 value offers still hanging around. I love that this is the new standard for a simple credit inquiry, and that basically my wife and I can score at least $2,000 in free money a year, exempt from taxes, with as little as two credit applications per year. (We actually do much better than this…) We just refinanced a mortgage and got a new homeowner’s insurance policy, so I know it’s not hurting us in other areas either.

Quick recap. 50,000 ThankYou Points = $500 in gift cards, ($500 Walmart Gift can be easily sold for $450+ online), $500 to pay down your student loan, $500 to pay down your mortgage balance, or $500 in airfare at the same rates as available at Expedia.com.