Great Article from Dans Deals on the pros & cons of credit cards :
Do your eyes glaze over every time I make another post about miles and credit cards?
Perhaps you’re young and haven’t gotten involved in credit cards or building up your credit yet, or perhaps you’re just scared of getting involved with credit cards.
If it’s the latter, you have good instincts. The credit card points system is partially subsidized by the millions of Americans who fall into the trap of debt, buying things they can’t afford, and paying huge amounts of interest to the banks.
If you’re susceptible to that behavior, then don’t play the game. Cut up all your cards, pay for things in cash, and be happy not being in debt. Any gain from the points system will be obliterated by interest payments.
Otherwise though you’re leaving valuable cash and miles on the table.
The banks are willing to pay huge sums of money or miles for you to signup for a card and they offer great benefits for using the card.
When you pay with cash or a debit card you get none of that.
You also lose the fringe benefits that many credit cards provide like online dispute resolution, return protection, warranty extension, car rental insurance, trip insurance, etc.
When fraud happens on a credit card you are not responsible for it while it’s being investigated. On a debit card those funds are immediately taken out of your checking account and you have to fight to get them back.
The bottom line is when used responsibly, credit cards are an incredible tool. I’ve used them responsibly for the past 12 years and thanks to them I have been able to fly around the world in first class on hundreds of flights and stay in 5 star resorts countless times. The trips I’ve been been able to share with my wife and now with my kids have created indelible memories that we’ll share for a lifetime.
But understand that credit cards can be death traps to those who don’t have proper discipline.
Q: I’ve never had a credit card. How do I start building my credit?
A: Start by having someone in your household or a relative add you as an additional user onto their account. Be sure that the account has been open for a while and is used responsibly. If the card is maxed out it will only hurt you.
After a couple months you should get a nice credit boost from that. You can then start building your own credit history by applying for a store card like from Gap, Kohls, Macy’s, Target, etc. as those can be easier to get approved for than real credit cards. Use the store card for a couple months for a small purchase each month and then you can attempt to get a real credit card.
Still not having any luck? Get a secured card. A secured card functions as a debit card except that unlike a debit card it helps your credit score. A debit card doesn’t help your score at all. Most secured cards don’t offer miles but some like the USBank LAN Secured card at least offers something decent.
Q: How is my credit score calculated?
A: Here is the makeup of your 850 point FICO score according to MyFico:
-Payment History: 35%.
Pay your bills on time and you should ace this category. The more accounts you have that you pay on time, the higher your score will be.
-Amounts owed: 30%
This measures your credit utilization ratio. The more money you spend, the higher your utilization ratio will be, which lowers your score. The more total credit you have available, the lower your utilization ratio will be, which raises your score. So the more accounts and credit you have, the better your score will be here.
Credit utilization ratio applies for each card you have individually (don’t use too much of your credit on any card) and across all of your cards collectively..
-Length of credit history: 15%
This takes into account your oldest account, the older the better. It also factors in the average age of your accounts.
It’s important to note that even if you close an account, it stays on your record for about 10 years after you cancel the card. So even if you close an account, you won’t hurt yourself in this category until 10 years down the line when the account falls off of your credit report. By that point you should have other older cards that will keep your average account age high enough not to adversely affect your score.
-New credit: 10%
This takes into account credit inquiries and new accounts, which can lower your score temporarily. These fall off your report after about 2 years and most banks only look at the number inquiries you have within the past 6 months.
In the short term you may see your score drop when you apply for a card due to this category and the average age of your accounts, but in the long run having more cards will raise your score, as they improve your payment history (35%) and credit utilization (30%) and eventually the age of your account, which continue to grow older even after you cancel the card.
-Types of credit used: 10%
This has little to do with the opening and closing of accounts but factors whether you have other accounts like retail accounts, auto loans, a mortgage, etc. The more varied your portfolio the higher your score.
Q: Isn’t it bad for your score to close a card?
A: I have a FICO in the 800s, among the best scores in the country. Anything above 750 is basically considered to be a perfect score. And I’ve closed hundreds of cards.
Understanding how your score works is key here. Again, the 2 primary factors making up 65% of your score are your payment history and the amount of money you owe. So always make sure to protect those.
A credit card continues to benefit the length of your credit history (the 3rd most important factor at 15% of your score) for 10 years after its been closed.
The only negative outcome of closing a card is losing the credit line, which can hurt your credit utilization. That can be avoided in several ways. Many banks allow you to move a line of credit onto a different card. Some banks may be more willing to approve you for another card contingent on moving part of line of credit from an older card onto a newer card. Or they may want to completely close out the older card and move the entire line onto the newer card.
Now you have to strike the right balance between your income and your total credit. You don’t want to have too much total credit. So don’t sweat it if you have to close a card, you can always get another to get your credit line back up to where it was and once again, there won’t be any negative affect from the closing the card.
Note that while you can close a card via secure message or chat without having to call up, typically if you call up, the retentions department may offer to waive the fee for another year or give you miles to keep the card. Even if they don’t do that, many cards can be downgraded to a free version and you’ll get a refund of the annual fee. You typically have between 30 and 60 days from when an annual fee is billed to have it refunded if you close a card though some people have had success getting a fee refunded by cancelling a card for up to 6 months after being billed.
Q: Isn’t it really bad to close your first ever credit card?
A: Perhaps, but probably not.
It’s a good idea to start off with a no-annual fee card as one of your oldest cards so you don’t have to close it. For example, Chase Freedom is an incredible no-fee card.
If you have one card which is wayyyy older than other cards then you will want to keep it open and that establishes your credit length.
However, if your oldest card is not that much older than the next card, it won’t make a big difference.
Either way it will take 10 years after closing your oldest card until it falls off your report. So even if your oldest card is 2 years older than your next card, in 10 years from now that won’t make a big difference.
Note that AMEX always reports every card you open as being opened in the year that you first got an AMEX card. So if an AMEX was your first card then don’t sweat it! Whenever you open a new AMEX card it will be as if that account was open from the date you opened your first ever AMEX card.
Q: Isn’t it bad for your score to open a card?
A: When you apply for a card a credit inquiry or hard pull is done on your report. At just 10% of your score, new credit is one of its smallest factors, so changes here are only worth a few points. The negative effects of a hard pull lessen after a few months and most banks only care about the number of hard pulls from the past 3 or 6 months. After 2 years they fall off completely.
A new account will also temporarily lower the average age of your accounts, a subset of the 15% of the length of credit history category. However that card will eventually improve your average age as it continues to help for that even if you close it for 10 years after you close it.
More importantly, when you get a new card, you get a new line of credit. 30% of your score is made up of amounts owed and credit utilization so the more credit you have, the better your score.
So the answer is that in the short-term your score may go down slightly, but longer-term your score will only go up.
Q: I got rejected for a card. Now what?
A: Once you apply for a card they have pulled your report.
So if you are denied be sure to call the bank to try to get approved. It can take several tries, but typically calling or writing via secure message on the bank’s site to reconsideration departments can turn a denial into an approval, especially if you are an existing customer.
Good strategies include:
-Proactively offering to shift credit lines around from other cards to get the new application approved.
-Proactively offering to close an older card you don’t use anymore and move over the credit line to get the new application approved.
-Explaining how you want the benefits the card provides. Items like free baggage and primary car rental insurance are good reasons to want a card, so learn about the unique benefits that each card has to offer besides for a killer signup bonus.
-The banks are afraid of people just applying for credit to rack up debts that they won’t pay. Your job is to explain why you are NOT one of those people and why you want the card.
-Explaining why you might want 2 versions of the same card. HSA spending should often be done on a dedicated card. Different business need different cards to keep expenses separately. Even the same business may want to track spending on different clients on separate cards.
-Explaining how you’ve never had a late payment or that you’re a loyal customer for x amount of years.
-Explaining your loyalty to the bank, especially if you have a checking account with the bank.
-Be friendly! Ask the person how their day is going and they’ll be more likely to want to help you out. Reconsideration reps have all the power, so it’s up to you to become their friend. A DDF user who homebrews beer found out that the agent also makes his own beer. After talking beer strategies the card application was approved!
No luck over the phone or via secure message? If you have at least $10,000 in a Chase checking account your banker can send in a special reconsideration form requesting that you be approved.
Citi is also very good about approving cards if you write to them via snail mail: Mr. Ken Stork,
Office of the President, PO Box 6000, Sioux Falls, SD 57117
Q: Won’t I lose my points if I close a card?
A: Airline or hotel credit cards accumulate points in your airline or hotel loyalty account.
Those points remain there even if the card is no longer active, and aresubject to the normal expiration dates that you can find in this post.
You will not instantly lose any earned Hyatt/Starwood/American/BA/Delta/Southwest/United/etc. points just for closing their credit card. Some representatives use scare tactics and say your points or tickets will be lost if you cancel the card but it’s just misinformation. The only thing you will lose are points earned from spending since your last statement closed, so you may want to wait for your next statement to close before closing a card.
Proprietary credit card point programs (American Express Membership Rewards, Barclays Rewards, Citi ThankYou Points, Chase Ultimate Rewards) do not expire as long as you keep at least one card open that is enrolled in their respective program.
If you want to close a Sapphire Preferred card you have several options to keep your points active.
1. Downgrade it to a regular Sapphire card. Your points will remain active but you or your spouse will need to have a card like Sapphire Preferred or Ink Plus to actually transfer the points into miles.
2. Downgrade it to a Freedom card. Same issue as the Sapphire card has above.
3. Transfer the points to another Chase Ultimate Rewards card that you or your spouse has.
4. Transfer the points to an airline or hotel program.
Q: What do you do about annual fees?
A: On some cards those pay for themselves. Take the Starwood or Everyday Preferred cards where additional cardholders are free.
If you have 5 additional cardholders on either of those cards you’ll get $180 to spend at a small business in November. You can have up to 99 additional cards. And each of those cards are also eligible for other AMEX promotions that run all year long.
On cards from other banks they can be worthwhile for the benefits provided, but you can always cancel a card to get back the annual fee. You typically have 30-60 days to do so once you are billed for the fee. Many cards also allow you to downgrade to a free card to get the fee waived.
Many cards also don’t have a fee for the first year, or even if they do they come with a large signup bonus worth the fee several times over.
In short, they really are not a big deal.
Q: Are there any tricks to raise your credit score quickly?
A: There are a few.
1. Try to pay off your credit card bills before the statement prints. Once it prints the amount owed can severely hurt your score even if you pay it off on time.
You can request that all of your bills print on the 1st of a month so you know exactly when to pay them off. I try to pay off everything but about $1, so that when I get the bill in the mail I have a $1 amount owed. That shows the card is still being used, but that it’s not being heavily utilized, which improves my score.
Even if it’s too much for you to do this try to at least keep your spending when the statement closes under 15% of the credit limit of your card.
Amounts owed makes up a whopping 30% of your score, so this is a quick and easy way to get a nice bump.
2. 10% of your score is made up by the types of credit you have used. Have cards from multiple banks and have other kinds of loans as well.
For example, even if you can afford to pay for a car in cash you should still finance it. First of all, you can usually get a nice instant rebate by financing and there’s typically no penalty to pay if off early. Second of all, once it’s paid off you’ll get a nice score boost.
3. Use business cards. Amounts owed on business cards from banks like AMEX and Chase aren’t reported on your personal credit report. So even if the statement closes with a large amount owed it won’t hurt your score like that would on a personal account.
Q: I don’t make my own income, how can I get a credit card?
A: As long as you live in the same household as someone who you can rely upon to provide from their income you can include all of that household income when reporting your income on a credit application.
Income isn’t listed on your credit report, it’s based on what you report. And you should always report total household income as the more income on the application, the greater the odds of approval are.
Q: Why is my credit score different depending on where I check it?
A: There are thousands of sites offering to give you your credit score for free. They advertise heavily but their goal is to get your info with which they can sell ads and sell you other products. Their scores are calledFAKOs and are basically meaningless. They look at your report and based on their own criteria make up a score on the spot. No creditor is ever going to use that score.
The only place where a consumer can buy their real FICO credit score is from MyFico. If you’re you’re getting your score elsewhere it’s a fake. I can also look at your report and make up a score, but that doesn’t mean it has a basis in reality.
You should always keep tabs on all 3 of your reports by usingannualcreditreport.com, the only government sanctioned credit report site. If there are mistakes there be sure to dispute them! If there are hard pulls that shouldn’t be there or that should have fallen off your record by now dispute those as well. Unfortunately that site only shows your report, it does not give you a credit score.
Checking your own credit report does not hurt your score.
There are 3 credit bureaus, Experian, Equifax, and Transunion, so you will have a FICO score for all 3. Some banks, like Barclays and Discover, allow their cardholders to view one of those scores for free. You can view your FICO Transunion ’08 score if you have a Barclays card here.
Some cards will mail you your current FICO score after you apply for a card.
To make things more complicated there are different versions of FICO scores based on criteria set in ’98, ’04, or ’08, but that’s getting way beyond the scope of this article.
Q: 3BM? MBM? AOR? What in the world is everyone on DDF talking about?
A: DDF, or the DansDeals Forums is chock full of great info when it comes to credit cards.
In short though, a 3BM means using 3 web browsers, like Internet Explorer, Chrome, Safari, Firefox, Opera, Maxthon, etc, to apply for 3 different cards from the same bank, as close to each other as possible. An MBM just stands for multiple browser method. Personally I’ll fill out the application form on all 3 browsers and then hit submit on all of them within a few seconds. This way you can get 3 cards with just 1 credit pull. There’s no guarantee you’ll get accepted to all 3 or that you won’t get more pulls, but this increases the odds of getting multiple cards with 1 pull.
Of course it doesn’t have to be 3. I’ve had successful 12BMs. But that was really tough and I don’t advise you to try that at home unless you’re a trained professional
If you’re new though, start with 1 and keep your life simple. It takes time to go from 0 to 60.
An “AOR” or app-o-rama is the process of using multiple 3BMs from multiple banks as quickly as possible, in order to get approved for more cards from more banks. People sometimes stagger their AORs every few months to get more approvals though that’s a tool to stay organized more than a rule to live by.
Note that when applying for a Capital One credit card you will get 3 hard credit pulls every time you apply for a card, making them one of the more hated banks out there.
Q: So Capital One checks all 3 bureaus, but where do the other banks check?
A: It generally varies based on your home state. This DDF thread tried to make sense of the madness.
If you’re in a state where one of your reports is getting hard hit you may want to freeze that report and have a bank check another more seldomly used report to increase the odds of getting approved for a card. More info on freezing from Equifax, Experian, and TransUnion. Note that many banks won’t be willing to check a different report and you may have to try a few times to find a rep from other banks to do it as well.
Q: I want to buy a house, how will credit cards affect my mortgage?
A: Like I said before, opening a card causes a short-term point loss and a long-term point gain.
If you are buying a house within a few months, then take a break from applying for new cards.
Otherwise you shouldn’t have any problem explaining the mileage game to a mortgage officer in case they ask why you have so many lines of credit. In fact if you are using your credit wisely your score should be excellent even if you do open lots of credit cards, which will mean you’ll get the lowest possible interest rates.
Q: Do I qualify for a business card and why do I want one?
A: The benefits of a business card are twofold.
1. Spending on a business isn’t reported on your credit report, so even if you max out your cards and don’t pay them off early it won’t hurt you.
If you don’t pay your bills on time that will hurt you, but otherwise it’s just not reported.
2. When you close a business card it doesn’t affect you as the credit line and the age of the account was never reported either.
For example if your name is Joe Smith and you sell items online, or if you have any other side business/hobby and want a credit card to better keep track of business expenditures you can just open a business credit card for “Joe Smith Sole Proprietorship” or “JS Sole Proprietorship” as the business name.
You don’t need to file any messy government paperwork to be allowed to do that.
Just be sure to select “Sole Proprietorship” as the business type and just use your social security number in the Tax Identification Number field as well as in the social security number field.
If you’re like me and you run more than one business you can signup for multiple of the same card for each business to manage each businesses expenses separately.
Q: Do I want a card that earns miles or a card that earns cash back?
A: Age-old question. It boils down to how you redeem your points.
If you use them for round-trip coach tickets booked in advance then you may do better taking cash back and just buying your flights. Or find a card that allows you to use points for a paid flight.
If you book short-haul coach flights, flights to Canada, flights to Hawaii, one-way coach travel, last-minute coach travel, coach travel with a stopover, business class travel, or first class travel you will be better off with real miles.
Q: What card gives the most bang for the buck?
A: That all depends on what you’re after.
First off, read this article, “Where Should You Be Using Each Of Your Credit Cards?”
But it really depends which points you are trying to accumulate.
I wrote an article on “30 Awesome Things You Can You Do With 75K-95K Ultimate Rewards Points“ that you can get from opening a single credit card right now. That gives you an idea of how you can be using those points. In the future I’ll make an article like that for other point currencies.
Of course it’s always good to open different kinds of cards to hedge your bets so that you’ll have different kinds of points that can come in handy for different kinds of trips.
-If you want Starpoints: Starwood Preferred Guest® Credit Card from American Express Transfer options at a 20K:25K ratio include Alaska, American, ANA, British Airways, Delta, Flying Blue, LAN, Singapore, and USAirways.
-If you want American Express Membership Rewards points: The Amex EveryDay Preferred Credit Card from American Express Earn between 1.5-4.5 points per dollar if you use your card 30 times that month. Transfer options include Air Canada, ANA, British Airways, Delta, El Al, Flying Blue, and Singapore.
-If you want American Express Membership Rewards points without an annual fee: The Amex EveryDay Credit Card from American Express.Earn between 1.2-2.4 points per dollar if you use your card 20 times that month.
-If you spend heavily on airfare: American Express® Premier Rewards Gold Card
-If you want Chase Ultimate Rewards points from a business card: Chase Ink Plus Transfer options include British Airways, Hyatt, Korean, Singapore, Southwest, and United. Earn up to 5 points per dollar spent and for a limited time, an unprecedented 70K signup bonus.
-If you want Chase Ultimate Rewards points from a business card without an annual fee: Chase Ink Cash Earn up to 5 points per dollar spent, but you or a spouse will need a card like Ink Plus or Sapphire Preferred to transfer points to miles.
-If you want Chase Ultimate Rewards points from a consumer card: Chase Sapphire Preferred Earn up to 3 points per dollar spent.
-If you want Chase Ultimate Rewards points from a consumer card without an annual fee: Chase Freedom Earn up to 5.5 points per dollar spent, but you or a spouse will need a card like Ink Plus or Sapphire Preferred to transfer points to miles.
-If you want points that can be used towards any paid travel without restrictions: Barclaycard Arrival Plus™ World Elite MasterCard® Earn 2 points per dollar plus get 10% back every time you redeem for an effective 2.22% cash back towards all paid travel charged to your card. Even if that travel is cancelled you still get the 2.22% back as cash.
-If you want to have airline cards for flight benefits such as waived checked baggage fees, flight discounts, and pre-boarding:
–United MileagePlus Explorer card.
–Gold Delta SkyMiles® Credit Card from American Express
–Chase British Airways Visa Signature
–Citi AA Mastercard
–The US Airways® Premier World MasterCard®
–The Hawaiian Airlines® World Elite MasterCard®
-If you want lounge access and many other travel benefits and statuses:Platinum Card® from American Express
-If you don’t care about points but would rather have 0% APR on Purchases and Balance Transfers with no fees: Chase Slate
Q: Any last tips?
A: Stay organized!
Make a spreadsheet with a list of all of your cards.
Include the date you applied for card, when you need to complete spending to get the signup bonus, what date of the month that your statement generates so you know when to pay it off early, what the annual fee is on subsequent years, etc.
Also include your mileage accounts, when the miles will expire, etc.
Because it’s very hard to stay ahead of the game if you don’t have a good handle on what you already have.