Miles & Points 101: How Credit Cards Affect Your Credit Score

How credit cards affect your credit score

This is the part of the process where most people get hung up. Please don’t be one of those people. I don’t want you to miss out on all of the free travel you can earn with these strategies just because you have a negative view of credit cards.

I have explained this strategy to enough people to know that, at this point, you have a lot of questions and concerns about applying for multiple credit cards. And that’s totally understandable! 

So in this section, I want to tackle the biggest objections I hear when I explain these travel strategies to my friends and family (these are the same questions I had when I was first starting out too!)

Won’t applying for multiple credit cards hurt my credit score?

I’m diving straight into everyone’s #1 concern first! The short answer is no. I’m assuming that the majority of people reading this guide understand what a credit score is, but just in case…

According to the Merriam Webster Dictionary, a credit score (or credit rating) is:

In the U.S., there are three major credit bureaus who track your credit score. They include Experian, Transunion, and Equifax. They rate your credit on a scale between 300 - 850 (the higher the better). Anything above a 750 would be considered an excellent credit score.

When I first started looking into travel credit cards back in 2013, I had just graduated, I had one student credit card, and I hadn’t built much of a credit history. For that reason, my credit score was somewhere around 720.

Five years after signing up for many travel credit cards and implementing all of the strategies (and more) that you’ll read in this guide, my credit score has increased to over 800. There is a free service that you can use to check your credit score called Credit Karma, and below is a screenshot from my Credit Karma account for proof.

But I don’t want you to just take my word for it. I want you to personally understand how applying for credit cards affects your credit score so you can mentally get yourself past this fear. This part is going to be a bit long and probably a little boring, but stick with me, because it’s really important.

Let’s start by looking at what factors make up your credit score. Below is a chart that shows the 5 major components:

 I want to help you understand each one of these components so you can get a better idea of how applying for multiple credit cards will affect your overall score.

Payment History - This section is the most important because it is weighted heavier than any other factor in your credit score. This section measures whether or not you pay your bills on time. The fastest way to damage your credit score is to miss a payment!

Credit Usage - This portion of your credit score is determined by your debt to limit ratio, otherwise defined as the available credit that you're using. For example, if you have five credit cards and your credit limit is $10,000 on each credit card, your total amount of available credit would be $50,000.

If you've racked up $5,000 worth of charges across your different credit cards, your debt to limit ratio would be 10%. The lower your debt to limit ratio the better. According to Credit Sesame, you should keep it below 10% to keep your credit score in good standing.

[$5,000 / $50,000 = 10%]

Length of Credit History - This section should be renamed "average length of credit history." All of your open lines of credit are averaged together to make up your length of credit history. The longer your average is, the better. This is why you shouldn't cancel old credit cards even if you aren't using them anymore (as long as you're not paying an annual fee).

Account Mix - It's good to have a mix of different types of credit on your credit report. Credit reporting agencies like to see that you can responsibly manage multiple different types of credit. For example, if you have a home mortgage, an auto loan, and a few credit cards that you've paid off on time, this is proof that you're capable of managing multiple different types of credit.

Credit Inquiries - This is the section of your credit score that gets damaged if you're applying for new lines of credit (credit cards). Every time you apply for a new line of credit, the bank will check your credit score (a hard credit inquiry). If there are multiple recent hard credit inquiries on your credit report, this signifies to banks and credit reporting agencies that you're in need of more credit (not a good look). This section of your credit score will be best when you have less hard credit inquiries.

Before we move forward, I want to make one important distinction that confuses a lot of people. There are actually two different types of credit inquiries. You have “hard inquiries” and “soft inquiries”. Many people have the misconception that checking your credit score will damage your credit score. This isn't true. 

When you personally check your credit score, it's considered a soft credit inquiry. A soft inquiry doesn't get reported on your credit report, and it doesn't damage your credit score. However, when a bank or potential lender checks your credit score, this is considered a hard credit inquiry. Hard inquiries can have damaging effects on your credit score, but it's usually very minimal.

You SHOULD be checking your credit score on a regular basis! Your credit score WILL NOT be damaged if you check it.

How is your credit score affected when you apply for multiple credit cards?

Now we're getting to the good stuff! Let's look at how applying for multiple credit cards affects your credit score.

Payment History - Opening multiple credit cards can actually benefit this section of your credit score. It seems illogical that applying for multiple credit cards could increase your credit score, but each credit card is considered a separate line of credit. If you're responsibly managing multiple lines of credit (i.e. paying multiple credit cards off on time), banks view this as more proof that you can responsibly manage credit.

Credit Usage - This is another section of your credit score that can benefit from applying for multiple credit cards. Opening a new credit card increases your overall amount of available credit. If you increase your overall amount of available credit without increasing your debt, your debt to limit ratio will drop. Let’s look at the math below.

Example: You have $50,000 worth of available credit. Your new credit card gives you a credit line of $10,000. Your debt stays the same at $5,000.

Old Credit Utilization - [$5,000 / $50,000 = 10%]
New Credit Utilization - [$5,000 / $60,000 = 8.33%]

The lower the better!

Your credit utilization is determined by your balance at the time of statement closing, not how much you spent during the month. Let’s say you have a $1,000 credit limit. You could spend $999 during the month, but make a payment of $899 the day before your statement closes. Despite the fact that you spent your entire credit limit, your utilization for the month will only be 10% instead of 99.9%. 

Some people call this credit cycling, and it is completely legal and allowed by banks. This is a great way to get spend on your cards even when you have a low limit. I personally have notifications set up on my phone to remind me to make a payment on every card a couple days before the statement closes so I have a controlled, steady 5% utilization on every card, every month - which does wonders for my credit score.

Length of Credit History - This is one section which will be hurt (a little) by applying for new credit cards. If you're consistently getting new credit cards, your average length of credit history will be younger. Older is better in the eyes of the credit reporting agencies. However, this section only makes up 15% of your overall credit score. So, it's not a huge deal to decrease your average length of credit history.

Account Mix - Unless you've never had a credit card, this section shouldn't be affected by applying for new credit cards. If you've never had a credit card, it would actually be a good thing to add one to your credit report.

Credit Inquiries - This is another section of your credit score that could be damaged by applying for multiple new credit cards, but again, it only makes up 10% of your credit score, so it's not a big deal.

Every time you apply for a new credit card, the credit card company will check your credit score, which means that a hard credit inquiry will show up on your credit report. Hard credit inquiries normally only damage your credit score a few points. After a few months, they won't be considered "recent," and your credit score will bounce back to where it was.

Summary of how credit cards affect your credit score

As you can see from the examples above, applying for multiple credit cards can benefit some sections of your credit score and damage other sections. The good news is that the sections that benefit are weighed heavier than the sections that get damaged.

Once you apply for a new credit card, the bank will check your credit score. This will result in a hard credit inquiry on your credit report that will slightly damage your score for a few months. If you are approved for the card, your new line of credit will decrease your average length of credit history which will also slightly hurt your credit score.

So that's the bad news. The good news is that (if used responsibly) the new credit card will help to increase your credit score because banks view it as more proof that you can responsibly manage credit. Additionally, the new line of credit will decrease our debt to limit ratio, which can also increase your credit score.

I think it's important that you understand the "WHY" behind the effects that multiple credit cards have on your credit score. However, all you really need to know is that applying for new credit cards may immediately lower your credit score a few points, but after a few months, your credit score should rebound back around where it started and maybe even increase in the long run.

Other things that hold people back?

What about annual fees?

If you start looking into applying for new travel credit cards, you’ll realize that most of these cards require you to pay an “annual fee.” In this section, I want to explain to you why you shouldn’t let these fees hold you back from applying for new cards.

Let’s look at the United Explorer credit card from Chase as an example. This card has a $95 annual fee. This means that every year you keep the card, you’ll pay Chase $95 for the privilege of using the card.

The good news about this specific card is that the annual fee is actually waived the first year. This means you only have to pay the annual if you decide to keep the card for a second year. 

This is actually the case with a lot of travel credit cards. Many of them will waive the annual fee for the first year to entice you to apply for the card!

Believe it or not, even if it wasn’t waived, the value you get from the card far outweighs the annual fee.  

When you apply for the card and meet its minimum spend, you’ll earn a welcome offer amount that can often change. Let’s use 40,000 miles for this example.

The value of United Miles varies depending on how you use them, but I value them at around 1.75 cents each. So, 40,000 points would be worth $700. 

[40,000 x $.0175 = $700] 

If I offered you this deal, e.g. if you give me $95, I’ll give you $700 in return. Would you do it? Of course you would! It’s an incredible deal, and that’s pretty much the exact same deal you’re being offered by many travel credit cards.

But I know what you’re thinking. What about year two when I don’t get a welcome offer and the annual fee isn’t waived. Then, I’m paying $95 and not getting anything in return. 

Most travel credit cards offer some great benefits beyond the orginal welcome offer. For example, the United card that we’ve been discussing offers a free checked bag anytime you use your card to purchase a United flight. It also offers member-only award flight availability and priority boarding on United flights.

If you fly United at least a couple times per year, these benefits will more than make up for the $95 annual fee, but what happens if you don’t plan on flying United? I want to teach you the strategy I use each time I have an annual fee.

Keep. Cancel. Downgrade.

When an annual fee is due after your first year of card membership, you have three options.

1. Keep the card and pay the annual fee

2. Cancel the card

3. Downgrade the card to another credit card with no annual fee

Numbers 1 & 2 are obvious options, but I bet most of you reading this didn’t know that downgrading your credit card was an option. Downgrading a credit card is simply moving your line of credit from one credit card to another. Normally, when I’m downgrading a credit card, I’m moving my line of credit from a card that has an annual fee to a card that has no annual fee. This way I can keep my line of credit open indefinitely without having to pay an annual fee.

Let’s look at the pros and cons of each of these three options 

Keep 

When you choose to keep a card, you will still have access to all of the benefits the card offers. Some examples of perks that might entice you to keep a credit card include increased spending bonuses, free airport lounge access, car rental insurance, free hotel night certificates, travel reimbursement credits, and more.

A specific example of a card I choose to keep every year is the Chase Sapphire Reserve® card. The annual fee on this card is $550, but it offers a $300 travel credit every year. Plus, it gives a free Priority Pass membership that allows Kara and I unlimited free access to over 1,500 airport lounges around the world.

Another example of a card I choose to keep is the IHG One Rewards Premier Credit Card. Every year when I pay the annual fee of $99, I get a free night certificate that can be used at many IHG hotels around the world. Some of these hotel rooms cost over $300 per night, so it’s a no-brainer to keep this card every year.

What about when it’s not so obvious?

This is something that I really enjoy—micro-managing my travel cards, points, statement credits, etc. to see, in detail, how much value I’m getting from a given card. I take this to the next level, but you can easily do a more toned-down version of this. Let’s take my Platinum Card® from American Express as an example. I have mini databases that I’ve built to manage each of my cards in a program called Notion, but you could do something similar in a simple spreadsheet.

Let me break down what you’re looking at. Every month when I receive my statement, I take two minutes and input a few pieces of data:

1. How much I spent on the card

2. How many points I earned

3. Value of statement credits for the month

4. How many times I visited an airport lounge (a perk of this specific card)

I value the points at 2 cents each - your personal value may vary, but I won’t redeem my points unless I’m getting at least that much value, so this number is accurate for me.

The lounges are valued at $20 each. Normally it would cost $32 to enter these lounges if you were paying cash, but I would not pay that much to enter a lounge. I would probably never pay more than $20 if I didn’t have the Platinum card, so I consider that to be the value I get. Again, maybe you would only pay $10, or nothing at all! Everything can be valued differently, just determine how you value these perks.

Then I take the statement credits (which I value as the dollar amount, given they are just subtracted straight from my bill), and add it all up. 

This exact database has a formula in the background that will actually take the annual fee and divide it by 12, which is then subtracted from the previous number we added up. This results in the final column - the NET value gained each month. The key word here is NET, because this number is the overall value gained minus the annual fee, meaning this is pure value on top of what you pay to hold the card. 

As you can see, in just eight months, I’ve gained almost $4,000 worth of value from this card. When the $695 annual fee (Rates & Fees) comes in four months from now, I’ll have no problem paying it because I can see, very clearly and specifically, how much value I’m getting out of this card. 

If I was only getting around $700 of value, I’d consider one of the next options.

Cancel 

If the benefits you receive from the card don’t outweigh the annual fee, it doesn’t make sense to keep the card and pay the annual fee. So at this point, you either need to cancel or downgrade the card. 

Downgrading a credit card can actually help to increase your credit score. So I usually make that my first option. However, it’s not always possible to downgrade a credit card. If that’s the case, you’ll need to cancel it. 

There is a possibility that canceling a credit card will hurt your credit score, but if it does, it probably won’t be by much. The reason it can hurt your score is that it will decrease credit usage. Going back to the math I showed you earlier, you’ll have less available credit if you cancel a card which will increase your credit usage ratio. 

Example: You have $50,000 worth of available credit. The credit card that you canceled had a credit line of $10,000. You have $5,000 worth of debt on all of your cards combined.

Old Credit Utilization - [$5,000 / $50,000 = 10%]
New Credit Utilization - [$5,000 / $40,000 = 12.5%]

I really wouldn’t worry too much about this hurting your credit score unless the card that you’re going to cancel makes up over 30% of your total available credit. A small 2.5% increase like the one shown in this example wouldn’t hurt your credit score by much if at all.

Canceling a credit card is also going to affect your length of credit history. Remember, your length of credit history is the average length of time your credit lines have been open. The higher your average the better. 

So let’s say you have 5 credit cards:

Credit card #1: Opened 10 years ago

Credit card #2: Opened 7 years ago

Credit card #3: Opened 4 years ago

Credit card #4: Opened 1 year ago

Credit card #5: Opened 1 year ago

In this example your average length of credit history would be: 

(10+7+4+1+1)/5 = 4.6 years

So if you canceled one of those cards you signed up for last year:

(10+7+4+1)/4 = 5.5 years

Your average length of credit history would increase to 5.5 years. In this case, your average length of credit history would actually increase which would be good for your credit score. The only time you can really get yourself in trouble by canceling a credit card is if you cancel a really old credit card.

For example, if you cancel your oldest credit card:

(7+4+1+1)/4 = 3.25 years

It would decrease your average length of credit history to 3.25 years which would negatively affect your credit score. Hopefully, now you can see that, in most cases, canceling a credit card really isn’t as big of a deal as people make it out to be unless that card makes up a major portion of available credit, or if it’s one of your oldest cards. 

Downgrade

If the benefits of a credit card do not outweigh the annual fee, your best option is to downgrade the card. This will keep your original line of credit open which will increase both your average length of credit history and your credit score. 

Let me explain that in plain English. When you downgrade a credit card, your line of credit moves from one card to another. The bank doesn’t consider this a new line of credit. Instead, they consider it a continuation of your original line of credit. 

If you move your line of credit to a card with no annual fee, there’s no reason you shouldn't keep that card forever. You aren’t paying anything to keep the card open, and it’s increasing your average length of credit history the longer you keep the card which ultimately increases your credit score. You don’t even have to use the card once you downgrade it. You can throw the downgraded card in the drawer,never use it again, and it will still increase your average length of credit history. 

In order to downgrade a credit card, all you have to do is call the bank, and tell them you don’t want to keep your current card because you’re not getting enough value from the benefits to justify the annual fee. However, you would like to keep your line of credit open with the bank if there is a card you can downgrade to with no annual fee. 

In most cases, the banks want to keep you as a customer, and they will gladly downgrade your line of credit to a card with no annual fee. 

Summary

There are many credit cards that offer enough ongoing value to justify paying the annual fee. In this case, you should pay the annual fee and keep the card. If a credit card does not offer enough ongoing value to justify paying the annual fee, you should first attempt to downgrade the card to a card with no annual fee. If you can’t do that, you should cancel the card unless you’ve had the card for a really long time, or if it makes up a large percentage of your available credit. In this case, it may be worth paying the annual fee to keep your credit score in good standing.

What about the interest fees you have to pay when you use a credit card?

This concern usually comes from people who aren’t super familiar with how credit cards actually work. When you spend money on a credit card, that doesn’t mean you’ll immediately have to pay interest on the money you spend on the card.

The only time you have to pay interest on your credit card purchases is when you don’t pay off your bill in full every month. If you choose not to pay your bill in full at the end of the month, it’s called carrying a balance. At this point, you’re indebted to the credit card company because they have essentially extended you a loan that you haven’t paid back. Since you haven’t paid back their money, they are going to start charging you interest. 

Kara and I have never paid a single penny of interest on any of our credit cards because we always pay them off in full each month, so we never carry a balance. Credit card companies actually make this super easy.  

I have a really bad memory because I’m usually thinking about 1,000+ things at once. If I had to remember to pay my credit card bills at the end of each month, it would be a mess. I would forget to pay and end up paying interest fees due to absent mindedness.  

Thankfully, all credit card companies offer automatic bill payments. This allows you to go into your online account and set up your bills to be automatically paid online from your bank account every single month.

This means, as long as you set up auto pay and have enough money in your bank account every month, you won’t have to pay a single penny of interest. The first thing we do when we get a new credit card is login to our account and turn on auto pay. That way we never have to worry about remembering to pay a bill. Paying our bills automatically each month helps us to build an even better credit score, and it keeps us from paying any fees.

Is this legal?

Previously, these tactics were known as “travel hacking” though we don’t refer to them as such anymore (the banks don’t like it—and rightly so).

Honestly, the word “hacking” has a negative connotation. Most people associate it with internet hackers who are operating on the dark web sending viruses to people’s computers and stealing their money.

Whoever coined the term “travel hacking” really did us all a disfavor. Travel maximizing probably would have been a better term, but they didn’t ask me. 

Our goal as travelers is to exploit different loyalty programs to earn the maximum amount of free travel. Now “exploit” may sound like a negative word, but it depends on which definition you choose to use, and I choose #1.

We are making productive use of the opportunities that are presented to us by these loyalty programs. There are some people who may argue that we’re taking advantage of these loyalty programs and using them unfairly to our advantage, but before you jump to that conclusion, I think it’s important to step back and understand how and why these loyal programs operate. 

The first loyalty programs were actually started by banks back in the 1970’s. They started giving away cheesy gifts like toasters and blankets to their best customers and new customers. According to Randy Peterson, the success the banks were seeing with this strategy encouraged the airlines to start thinking about what it would look like to reward their most loyal customers. 

An airline which doesn’t exist anymore called Western Airline was technically the first airline to launch a frequent flyer program, and it was super simple: Fly 5 trips and receive a $50 travel voucher.

Shortly after the launch of Western Airlines’ frequent flyer program, American Airlines followed suit in 1981 and created the first true frequent flyer program that we know today.

The program was dreamed up by a bunch of marketing executives as a way to get passengers to book more flights with American Airlines instead of their competitors. Their goal by introducing the loyalty program was to get passengers to fly an extra ¼ of a flight with American Airlines per year. If they could accomplish this goal, the extra ¼ of a flight would pay for the benefits they were offering through the loyalty program. 

American Airlines' first loyalty program turned out to be more successful than they ever imagined. Instead of customers booking an extra ¼ of a flight with them per year, they booked an EXTRA dic flights per year, making the loyalty program wildly profitable! 

To this day, loyalty programs continue to be profitable for airlines, which is why every airline has a loyalty program. Plus, when you take into consideration that a large chunk of these miles go unused every year, airlines and hotels are getting a ton of value from these loyalty programs, while most “normal people” rarely see any real benefits. 

The average person only earns 11,000 frequent flyer miles per year which isn’t even enough for a free flight in the U.S. sometimes with most frequent flyer programs. Plus, most airlines don’t make it easy to understand their loyalty programs, and they make it even more challenging to redeem your miles. For these reasons, it’s estimated that there are over 10 TRILLION unused miles in circulation today. 

All this to say, airlines count on most people not using their miles to their full potential. American Airlines as a company receives value for the customer loyalty they build through their frequent flyer programs, but the average person rarely receives any value due to the confusing nature of these programs.  

That’s why a huge opportunity exists for those of us who take the time to learn how to maximize these programs! American Airlines isn’t concerned about the few people who actually take the time to figure out how to maximize their loyalty program because they are making plenty of money off all of the people who are letting their points go to waste.

Wondering why banks make this so easy?

You’ve probably heard the quote, “When something sounds too good to be true, it probably is.” That’s a quote that I’ve found to be very true in the majority of my life experiences. If something sounds too good to be true, you should definitely be wary of it.

I realize that everything I’ve told you so far in this guide borders the line of too good to be true. This is actually one of the things that held me back from getting started in the beginning. I thought there had to be some kind of a catch. That’s why I spent over a month researching everything I could read online, and I started out really slowly by applying for just one travel credit card. 

It wasn’t until I was on my first free flight to Florida (the one I was telling you about at the beginning of this guide) that I really believed this miles and points stuff actually worked. I realize you might be feeling like this too, which is why I think it’s important to look at why credit card companies would just “give away” thousands of miles and points.

Credit card companies offer big welcome offers to encourage new users to apply for their credit cards because they know they have the potential to make a lot of money from the average credit card user. 

Don’t worry, you’re not going to be average, but you should be grateful for the average people that allow credit card companies to offer such lucrative rewards. 🙂

Credit card companies have many different ways of making money off of their customers. To start, every time you use your credit card at a store, the credit company charges that merchant an interchange fee of 1.5% - 2%. This means if you spend $10,000 on your credit card, the credit card company will make between $150 and $200 in interchange fees. 

That’s just the start of where banks make their money with credit cards. The majority of their profit comes at the user’s expense. 

According to CNBC, the average interest rate on a credit card is ~17% (this is the interest rate that you’ll pay if you carry a balance on your credit card), and it’s estimated that over 50% of consumers will carry a balance on their credit card in a 12 month period. 

This puts the U.S. combined credit card debt at over 1 TRILLION dollars. So, if you combine annual credit card fees and the interest consumers pay on their credit cards, credit card companies make over 100 BILLION dollars from these fees.

The reason I wanted to share these statistics with you is so that you would have a better understanding of why credit card companies are able to offer such lucrative rewards. Plus, I want to make sure you don’t feel any guilt when maximizing your rewards.

Have I missed anything?

Hopefully at this point, I’ve tackled all of your objections. You should be excited to start learning how you can implement these strategies to maximize the amount of free travel you can earn, but if you still have questions, myself (and the whole Daily Drop team!) are here to help.

This isn’t right for you?

At this point, I’ve done my best to convince you to dive into the world of miles and points, but I’ve been doing this long enough to know that this isn’t for everyone. There tend to be two types of people who just aren’t destined to become miles and points aficionados, and that’s okay. It still doesn’t mean you should miss out on all of the value. Do you fall into one of the two categories below? 

1. There are some people who will never be comfortable with the idea of applying for multiple credit cards.

2. There are some people who are simply too busy to invest their time in learning these miles and points strategies.  

If you fall into one of the two categories listed above, please don’t leave here empty-handed! Our main goal is to educate and inform people about travel. If this guide hasn’t convinced you yet, we offer both a 5-day-a-week newsletter called Daily Drop, and a weekly round-up version that goes out each weekend.

This newsletter brings information like this to you in bite-size portions using up-to-date, real-world examples. Give it a try if you think we might be able to get you over the fence. 

Read our next installment to get to the fun stuff 😏