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If you’ve read any of my site, I could go on and on about the amazing benefits opening these travel rewards credit cards have. Whether it is airline miles, hotel points, or even points you can use on rental cars and train tickets, rewards can go a long way. But that’s when I get the big question: how does opening travel credit cards affect credit? And to be sure, it’s the question I asked myself years before starting to travel hack, and my doubts kept me from opening these cards. As someone getting married and merging finances, you don’t want to have bad credit. But fear not! Opening these cards won’t have a significant impact on your credit if you are careful and know what exactly makes up your credit score and how this affects it.
What Goes Into Your Credit Score?
For the most part, there are 6 main factors that go into your credit score. These have varying degrees of how much they affect your overall credit.
1. Credit Card Utilization
This has a high impact on your credit score. This is the balance you are keeping on your credit card at a given time compared to the total amount of credit you have. This is a really important factor for credit card companies as they see people who have a higher balance as being riskier and more likely to default or miss payments. As they don’t want that, you want to keep this below 10%. Honestly, the lower the better. Meaning, don’t spend beyond your means and make sure you can pay it off each month. Why? Because 1) You don’t want to pay interest, especially as travel cards have higher interest rates, and 2) It increases your utilization rate, thus lowering your credit score.
Here’s a simple breakdown of how this is calculated: if you have $100 on your credit card, and you only have $500 worth of credit, you’re at a 20% utilization rate. But if you have $100 on your card and $10,000 of credit, you’re only at a 1%. So in this regard, opening a travel credit card will actually benefit your score. With more credit, but the same spending as before, your utilization rate will be even lower, boosting up that score.
2. Payment History
This also has a high impact on your credit. This shows how many minimum payments have been on time, skipped, or late. Credit card companies want their money back, so late or skipped payments are always a red flag. Keep this to 100%. Anything below 98% will really cut into your score. Opening a new travel credit card will not affect this unless if you forget to make a payment.
3. Derogatory Remarks
This has a high impact on your credit. This is a remark on your credit such as foreclosure, bankruptcy, tax lien, collections, etc. This remains on your credit for 7-10 years. You do not want to mess with that, so try to have none. Credit card companies again don’t want to lose money via a person going into bankruptcy. Even 1 remark can affect your credit significantly. Opening a new travel credit card will not affect this.
4. Age of Credit History
This has a medium impact on your credit. Credit card companies like long, established credit, meaning you’ve been a consistent, reliable bill payer for years. They use your average credit age to determine this. So the older the better, with over 9 years being great, 7-8 good, and so on. This doesn’t affect your credit nearly as much as the prior ones, but be sure to keep all older, no fee, credit cards open and in good standing to keep your age of credit history on average higher.
Now this is will be affected by opening a new travel rewards credit card, as it lowers your average credit history. Again, this won’t be nearly as significant as a drop in credit as the above, but it will lower your credit age and cause a slight dip. However, this is cured over time. Once your credit starts aging again, you’re back to a higher history. Also, by opening one or two cards, this will hardly affect your credit age if you’ve had car loans, student loans, house payments, or even old credit cards open and in good standing still. It’s opening several cards a year that will affect this age. I’ve opened 4 cards this year and have only noticed a single digit difference on my credit from it.
5. Total Accounts
This has a low impact on your credit score. This shows credit card companies how many opened and in good standing accounts versus closed accounts you have. Strangely enough, the more accounts the better. This includes loans too. Over 21 accounts is great, 11-20 good, etc. This shows the creditors that you are responsible enough to have all these open accounts in good standing. And opening another account via your travel credit card will actually help in this regard.
6. Hard Inquiries
This has a low impact on your credit score. Hard inquiries are when you apply for credit, and they check your credit history. Credit card companies do tend to get wary of people opening several credit cards or loans at once. It seems risky to them. Usually, less than 2 is where you want to be at. With anything above 9 being pretty risky.
However, these inquiries drop off after 2 years. And while it can put a dent in your score the first few months after opening a travel credit card, I’ve noticed that the effects are pretty much gone within 90 days, with my score bouncing back to what it was prior to even opening the card.
So these are the main factors that play into your score and how opening a travel credit card will affect it. But at the end of the day, it’s super important to keep your spending normal (don’t overspend to meet min spends on these cards, only open what you can afford to spend normally), check your credit frequently with Credit Karma, Credit Sesame, or your bank’s website if available, and don’t open several cards at once. I recommend only 3 at a time maximum and wait 90 days before opening any more. This will help you a lot.
Another key thing to consider is you most likely need a credit score of 720 and above to apply for these cards. If you’re well past that, go start travel hacking! If not, start slowly building credit back by making payments on time and paying off your card each month. You can get a free credit report each year, so get that and read through it. If you have derogatory remarks and you feel they are a mistake, you can contest that and potentially get it removed. Either way, whether you want to open credit cards or just want good credit, always monitor your score.