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Credit cards represent the easiest way to earn miles and points, but can be extremely intimidating if you’re just getting started.  Before starting our miles binge, Mrs. Selfish and I were extremely concerned about anything that could affect our credit – it didn’t help that we didn’t really understand how it worked either.

First a Disclaimer: If you cannot pay your bills in full every month STOP READING NOW.  This game is not for you.  If you fall behind on your payments, you’ll owe way more than the miles or points are worth.

How your Credit Works

Your credit score is determined by 5 main factors:

  1. Payment History (35%): whether or not you pay on time.
  2. Credit Utilization (30%): how much of your credit are you using. A giant red flag for CC companies is too much credit utilization, which may work on a card per card basis.  For instance, putting a charge of $500 on a card with a $1000 limit will raise some flags, while putting $500 on a card with a $5000 limit will not.
  3. Length of Credit History (15%): how old are your accounts?  Many of us have one or two cards that are 10+ years in age, which help establish good credit.
  4. Types of Credit (10%): mortgages, car loans, student loans, credit cards.  I have no idea why having all of these would be perceived as a good thing, but if it helps raise your credit score, so be it!
  5. New Accounts (10%): opening a new account results in a small drop due to the credit inquiry.

When opening new credit lines a few things happen.  First, the average age of your accounts decreases.  Second, the credit agency affiliated with the credit card company performs a hard pull on your credit, which reduces your credit score by somewhere between 2-5 points.  Third, the amount of credit you have access to increases, which raises your score over time by decreasing your utilization.

A REAL LIFE EXAMPLE

Credit Score

Here’s a snapshot of my credit (as estimated by Credit Sesame, a third party site which tracks your credit for free).  Up until 2011, I basically only had two credit cards – a William & Mary credit card I got back in 1999, followed by an American Express Blue card which I opened in 2004.

Since those days, I’ve steadily ramped up the number of cards I’ve applied for:

chart_1

As you can see as the years have gone by, I’ve steadily ramped up the cards in my inventory:

2010: +1 personal card: 3 total

2011: +5 personal cards, canceled 1: 7 total

2012: +5 personal , +2 biz, canceled 1: 13 total

2013: +3 personal, +2 biz, canceled 1 biz, traded 1: 17 total

Interestingly, my credit has stayed just about even over the last year and a half, despite the fact that I’ve applied for 17 cards!  This is probably due to the fact that the amount of credit I have access to is roughly 1200% of what it was when I started!

Should I slow down future applications, I expect my credit to continue raising, and here’s some things I’ll do a long the way to help.

Raising My Credit Score

Mrs. Selfish and I both have 700+ scores, which means we qualify for the best credit card bonuses.  We also don’t have any major loans coming up (house, cars, etc.), so we can safely continue applying for the foreseeable future.  As a personal goal, I’d love to get my score over 800.

Here’s a few things I’m doing to raise my score:

1. Reducing Credit Utilization – your credit utilization is determined by the % of the credit limit you hit on any given card.  Since this occurs when your card’s bill posts, paying off parts of your bill long before it posts will help you stay within healthy limits.  Some people have mastered the art of keeping their utilization rate below 10%, but I haven’t reached that point yet.

2. Keep Accounts Open – a lot of the cards I applied for waive the annual fee for the first year.  As I hit their one year anniversary I try to keep that credit around without having to pay the annual fee – I’ll deal with this one in a future post.

3. Reducing the Number of Hard Credit Pulls – After two years, a credit pulls fall off your credit report, reducing their impact substantially.  Just waiting and reducing the number of applications alone will raise my credit (all things being equal), though others have reported other dubious strategies.

Where to Start

Before you go crazy applying for new cards, your best bet is to take it slow:

1. Check your Credit Report and get your Credit Score – you can get a copy of your credit report once a year for free.  Most people recommend sites like annualcreditreport.com – where you can also pay to get a copy of your score.  What you’re looking for is a score above 760.  You can also monitor your score with free sites like credit karma or credit sesame, which track credit bureaus like Experian and Transunion.

2. Determine a Goal – planning for a first class honeymoon to Asia? A holiday in Paris? A family trip to visit Grandmom in California?  Having a tangible goal in mind will help you focus your efforts and determine what cards you should apply for.

3. Apply for Cards – sit down and apply!  I like to do all of ours at the same time for a few reasons. Firstly, it’s much easier to keep track of.  Secondly, by applying on the same day I can reduce the number of hard credit pulls each company sees.  For instance, if I apply for 1 Citi card, and a Chase card, Citi won’t know I’m also applying for a Chase card, and vice versa.

4. Secure the Cards – if you’re just starting off and have excellent credit, chances are you’ll be immediately approved.  If not, you may have to face an uphill battle.  Fortunately, credit card companies want to approve you, so the process is pretty simple. I’ve received more than my fair share of “Pending Approvals” and managed to get them all approved with a little persistence.  Million Mile Secrets has a great article on the subject.

5. Reach the Minimum Spend – most companies require you to spend $XX in order to receive $YY miles.  Shifting all of your purchases and bills to your new credit cards will help.  There are tons of helpful tips on ways to meet your minimum spend online.

6. Pay your bills IN FULL – if you can’t pay your bills on time in full every month, you should not use credit cards as a means to getting points. This is a game for deadbeats only, I’m afraid.

Up next, we’ll take a look at the main players and the best credit card bonuses.

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