This will be a two part series on credit scores, and what you can do to maintain a high score while amassing signup bonuses.
Just a few years ago, I wondered how some people could amass so many airline miles, to allow them fly around the world every year, and in premium cabins?! Years later, I found the answer myself – credit cards and their sign up bonuses. Now those signup bonuses and miles from credit card purchases are building up majority of my points portfolio. The goal of this post is to help you build up your points portfolio without creating a huge dent to your credit score.
That sounds easy right? Since a couple of American Express cards will give you enough signup bonuses to fly roudtrip to Europe in business class! So is that simply what I’m recommending you to do? Absolutely not! Opening and closing a credit line will both have an impact to your credit score!
Your credit score is a judgment about your financial health, at a specific point in time. It indicates the risk you represent for lenders, compared with other consumers. Usually better credit score will allow you to qualify for credits or better rates on loans and mortgages. On the other hand, lower score may prevent you from getting these, or at a higher rate. Therefore it is important to maintain your credit score at a certain level.
Here are some quick facts:
- Credit scores in Canada range from 300 to 900
- Score above 650 will usually qualify you for standard credit cards and loans
- Having your score at above 760 generally means you are getting the best rates, it is not much different from having a score of 900
- There are two credit reporting agencies in Canada – Transunion and Equifax
- You may obtain your credit report and score from the agencies above for a fee
- Credit score is built up over time, it does not happen overnight
There are five key factors in determining your credit score, it is very important to understand this when you are going for a credit application spree. They are payment history, amounts owed or credit utilization ratio, length of credit history, new credit, and types of credit. Each one have a designated weighting to it.
- Payment history – This represents the biggest portion of your credit score, and it should also be the easiest. Simply put, always always always pay your bill on time, do not miss any payments. Each late payment will leave a mark on your credit history (though not forever), so never make purchases on credit card when you don’t have the money to pay it off. The more on-time payments you make, the higher the score is.
- Amounts owed – This is actually the amount owed compared to amount allowed by all your creditors, a.k.a. credit utilization ratio. For example, if you have 2 credit cards, each have a $5000 limit, your total credit limit would be $10,000. If you have a $2000 balance on one card, and $2000 on the other card, your total amount owed would be $4000. Therefore your credit utilization ratio is 40%. The lower number the better it is, it means lenders are willing to let you borrow money, yet you are only using a small portion of it, this gives confidence to future lenders that you have the ability to pay back. There are two obvious ways to improve this category, one is to decrease amount owed, the other is to increase your total credit limit. I recommend you go with the later, and I will explain more in the next section.
- Length of credit history – It takes time to build up credit history, it also takes time to get a true picture of how responsible someone is with credit. Good or bad history, most information will be automatically removed from someone’s credit report after 6 – 7 years, so the only way to keep a credit report active, is to use credit, at least very minimally, on an ongoing basis. This score is determined by the average of all your accounts, and of course, the longer the history, the better.
- New credit – Frequently applying for new credit can signal financial difficulty. In the industry it’s called “credit shopping” and it does not reflect favourably on someone’s credit score. If you play in the miles and points game, then it is normal to have a weak spot in this category, though, it only contributes to 10% of your credit score, and I will explain how we can minimize the impact.
- Types of credit – Different types of credit shed light on how you handle your money overall. For example, consolidation loans mean that you’ve had difficulty paying your debts in the past. A line of credit is a revolving form of credit, like a credit card, and it’s easier to get into trouble with a revolving form of credit than with an installment loan where you make payments for a set amount of years and then it’s paid in full. Again this only accounts for 10% of your total score, and should not be something to worry about for the sake of getting free miles.
Hopefully this gave you some understanding of credit score, in the next section, I will specifically talk about do’s and don’ts when applying for credit cards. Click below for the next section
Sources: Government of Canada, Equifax, Ontario Debt Advisors