This is an article I wrote a few months ago, but people keep asking the same questions, so here it is again:
American Express is a DansDeals.com advertiser.
Originally posted on 10/08:
Do your eyes glaze over every time I make another post about miles and 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.
When you pay with cash or a debit card you get none of that.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%.
-Amounts owed: 30%
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%
-New credit: 10%
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%
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.Chase Freedom is an incredible no-fee card.
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.
Good strategies include:
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,
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.subject to the normal expiration dates that you can find in this post.
Proprietary credit card point programs (American Express Membership Rewards, Barclaycard 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.
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.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.
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.
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.
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 called FAKOs 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.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 using annualcreditreport.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 (EX), Equifax (EQ), and Transunion (TU), so you will have a FICO score for all 3. Some banks, like Barclaycard 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 Barclaycard 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.
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.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.
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 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 miles per dollar plus get 5% back every time you redeem for an effective 2.11% miles back towards all paid travel charged to your card.
-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 ExpressChase 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!
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.