Here’s the real deal on credit card scores…

The bad news

When you apply for a new credit card there is an inquiry on your account. New credit inquiries usually drop your score by a few points.

However, new inquiries only make up about 10% of your overall credit score, which means the drop is small.

As a general rule, if your credit score is above 700, then you’re in good position and have nothing to worry about when it comes to this initial drop. If you want to play it safe, then a credit score above 720 is even better.

The good news

Here’s the good news: a new credit card can actually increase your credit score over time because it will likely help your credit utilization ratio.

Here’s an example of how credit utilization ratio works. Let’s say that right now you are spending $3,000 per month and your total credit limit is $10,000. In this case, your credit utilization ratio is 30% ($3,000/$10,000).

Then, let’s say that you sign up for a new credit card and your overall credit limit increases to $15,000. Now your credit utilization ratio drops to 20% ($3,000/$15,000).

A lower credit utilization ratio helps your credit score because it shows that you are responsible and that you are more likely to stay within your spending limits.

Remember, at The Credit Card Fly we only apply for new cards to get the frequent flyer miles, which means your spending habits should stay about the same. This is because you simply want to spend the minimum amount you need to get the free points (usually about $1,000 in the first 3 months) and then cancel the card about one year later.

For this reason, many credit card churners actually see their score increase over time. Some of them have more than 12 credit cards and still maintain excellent credit scores above 780.

The only thing you need to know

No matter what your credit score is or how many cards you have, just remember one simple rule: don’t carry a balance on your card.

If you pay your credit card off each month, then your credit score will be fine, you won’t build up debt, and you can freely enjoy the massive travel perks of credit card bonuses. Keep your credit card debt at zero and you can enjoy free flights for many years to come.

The basic idea is that most cards fall into one of two categories.

1. Some credit cards allow you to earn actual airline miles for a particular carrier. These cards will be branded with an airline. For example, Delta or United.

2. Other cards allow you to earn points in a particular rewards program and those points can be transferred to an airline and converted into frequent flyer miles. In some cases, this is better because you aren’t locked in with one airline. For example, some cards allow you to transfer their points to any airline. Others only allow you to transfer them to certain airlines.

Long story short, the scoring systems differ, but the general idea is the same. Depending on the card you are using you’re either earning points or miles, but either way you can cash those in for a free plane ticket.

Some annual fee cards give you a nice bonus on sign up and wave the fee for the first year. Can I cancel before the first year ends to get out of the annual fee because it is waved in the first year?

Thank you for your advice! You rock!
— Matt

Hi Matt,

Yes — in many cases you can cancel the card before the time to pay the annual fee rolls back around. The best time to cancel is usually between 6 and 11 months. Some cards penalize you for canceling a card before the 6–month mark.

Also, in many cases you can call the credit card company around the 10–month mark, tell them you are considering canceling, and they may waive your fee for the next year. If that doesn’t work then you can always ask them to downgrade you to a card with no annual fee. This allows you to avoid the annual fee and keep the one year of credit history that you have already accrued, which will look better on your credit report.

Of course, if you’re hoping to sign up for the card again in a year or so to get more miles (in other words, “churning” the card), then your best bet is to call and cancel before the first year is up.

And, as always, remember to pay your balance in full every month.

You’re probably better off if you have a score of 720 or so to start with because that will give you a little bit of cushion if the new credit inquires drop your score by a few points.

Note: this drop is usually short term and in many cases if you have good credit, your score will actually increase in the long run as you apply for new cards.

As always, the most important thing is to pay your balance in full each month and to carry little or no credit card debt. At a minimum you should owe less than 50% of your maximum credit limit.

If you do those two things and have a credit score over 700, then you have nothing to worry about.