Credit Cards & Credit Scores Explained

This content is not provided by the bank advertiser. Opinions expressed here are the author's alone and have not been reviewed, approved or otherwise endorsed by the issuer. We may receive compensation for many links from our advertising partners such as American Express, Chase and Barclaycard as well as advertising partners of this site. Please see here for details.

You probably still have questions about what getting a new card might mean for your credit score, so let’s get into some more detail about credit scores in general.

When discussing points with most people who aren’t aware of the points world yet, their number one concern is always: “Yeah, Millers, but won’t this ruin my credit score?”

Nope! In fact, you will very likely see your credit score increase by taking advantage of the system!

(Note: To give you an idea, my credit score was in the low 700’s before I had credit cards. Today, I have 12+ credit cards and a score of 752)

You just have to know how it works, and (just like with everything we discuss here) have the right strategy.

The better your credit score, the better offers you can get and the more offers will become available to you. This gives you even more ways to further improve your score, all ending with more travel rewards!

You can earn hundreds of thousands of miles per year just from signing up to new cards! Since this is the most lucrative part of the points strategy by far, we want to make sure to take advantage of that!

Bottom Line: The more you utilize your credit using the below strategy, the more you will increase your score, and the better offers you will get for travel!

Credit Score FAQ: Quick Answers to Burning Questions

Before we go any further, let’s do a quick Q&A to help answer any quick questions you may have!

Where can I check my credit score online?
You can check your credit score in a number of ways. If you use a site like freecreditscore.com or creditkarma.com, you can obtain your free annual credit reports from the 3 different credit bureaus.

These sites does not contain your actual credit score, however, and you’ll need to purchase a credit tracking program from them to get the score.

Perhaps our favorite (and the easiest!) method is to simply sign up for a card that has free credit tracking. Most cards these days come with a free FICO credit score tracker that allows you to track your monthly score.

You can also use a site like Mint.com to track your score for free; it even offers its own advice for how to improve it!

Where should your credit score should be? What are the credit score ranges?
You goal should be to have excellent credit, which is credit anywhere from 720-850. The other credit score categories are: Poor (280-590), Fair (590-640), and Good (640-720).

What credit score is good?
Good credit” is technically the second highest category of credit scores, and is associated with scores from 640 to 720. “Excellent credit” is anywhere from 720 to 850. Having a score below 640 will make it much harder to find financing and credit.

Why did my credit score drop?
Credit scores can drop for a number of reasons: inquiries to your credit, having new credit cards, high credit utilization, or missing payments (see below for details on these categories).

Bigger penalties can stay on record for up to 7 years, whereas smaller infractions only stay for up to 2 years.

What credit score do you start with?
This is a good question that is difficult to answer. Of course, before you have any type of credit, you have no score! But many different things can affect scores, from your job to spending habits, loans, bills, and so forth.

Credit data is being built on you all the time, and all of it affects your score. Eventually, your score can level out, but if you don’t have a lot of data yet then it can be quite volatile.

Which credit score do lenders use?
The group that regulates the general credit score system is FICO, and that is the name of the score that is used by most lenders. Three different bureaus have their own credit score for you: Experian, TransUnion, and Equifax.

Other lenders may use their own individual score based off their own system. For instance, Upstart.com and GrowLocalProject.com both offer loans, but they utilize their own system for determining your creditworthiness.

How is a credit score calculated?
There is a complex algorithm used to calculate your credit score. In general, your score is made of 5 different categories: payment history, credit utilization, credit history, types of credit, and credit inquiries/requests for credit.

See below for more information on how these categories affect your score.

How does a credit score work?
Your score is a monthly snapshot of your current estimate of creditworthiness. Based on a number of factors, an algorithm will calculate a score.

This score is used by agencies to determine how much money they are willing to lend you, how much credit they would extend you, and what interest rates you can get on a variety of financial products.

Part 3 Trustworthiness
Your credit score is a measure of the trust that financial companies put in you to pay back your debts. The higher your score, the more trustworthy you are in their eyes!

Preparing for Your Points Strategy

The beginning of a good strategy is having sound finances. If you can’t pay off your cards each month, then you’ll need to get that in order before building a strategy.

Getting 1%-5% of your purchases back in miles is not worth incurring a 15%-30% interest charge!

If you don’t have a lot of credit right now, you can still build credit by executing the following strategy. You’ll just have fewer options and will have to start smaller.

The good news is that you can boost your score fairly quickly…often in less than 60 days!

Many people know that making credit inquiries can negatively impact your score. But what most don’t realize is that this is not the largest factor in your score, and your score could easily see a subsequent increase, depending on the reason for the inquiry.

While we don’t know the exact algorithm for determining credit scores, we do know the general weight certain things carry when it comes to determining the score itself. The following gives a summary of these factors.

Bottom Line: Start building credit now! The sooner you start, the quicker you can build your score and get better deals!

The 5 Credit Score Factors

credit score graph
Credit scores are determined by 5 main categories: payment history, credit utilization, credit history, types of credit, and requests for credit.

Factors 1 & 2: Credit History and Requests for Credit

Reviewing the graph, we can see that your credit history is about 15% of your score. While this isn’t the largest factor, having no credit history at all can mean you’re missing out on an easy boost to your score!

We also immediately see that a credit inquiry comes in at only about 10% of your score, which is hardly anything. In fact, each inquiry only sets you back a couple of points. After 2 years, these penalties are removed altogether.

If you want to be sure to maximize your score in this category, you’ll simply need to strategically make inquiries to your credit.

Don’t do it too often or the penalties will rack up, but if you never do it then you can never take the opportunity to increase it!

Hot Tip: If you’re pre-approved for a card, you will have less chance of rejection, which helps protect your credit score. Try to sign up for pre-approved offers as often as you can. Once you actually apply for the offers, they do affect your score, however. The better your score, the more pre-approved offers you’ll get…you can see how this becomes a powerful credit-building system!

Looking at the other categories, you’ll see that they all deal with open lines of credit. So while inquiring for new credit can slightly ding you, getting new credit is even more powerful and can result in a net gain.

Bottom Line: Opening a credit account now is the fastest way to growing your credit score if you have no history!

Factors 3 & 4: Payment History and Credit Utilization

Since payment history and credit utilization are the 2 highest factors, you’ll want to ensure you are clean in these categories.

Payment history means that you make at least the minimum payment on time each month. If you miss payments, it can stay on your history for up to 7+ years!

Your credit utilization is a measure of how much of your credit you are using. Typically, you won’t want to use more than 20% of any individual card, nor 20% of your OVERALL credit limit.

Bottom Line: Don’t miss payments or use a lot of your total credit at once! In fact, using 20% or less is probably the best strategy.

Factor 5: Types of Credit

Next up we’ll talk about credit types: installment, revolving, and open. Each is different and you want to have a mixture to maximize this 10% of the score.

Installment is credit that has a fixed payment each month. These are your basic loans (auto, student, mortgage) that you must pay off over a fixed period of time.

Revolving is the most common, and usually a credit card. A revolving credit is where credit is utilized and then paid off each month, so the net is that you have some utilization of the credit at all times.

If you want to extend the credit without paying, you can do so with an interest charge.

An open credit account is similar to a credit card, but you don’t have the option to extend the credit; it must be paid in full each month.

Certain credit cards use this type of credit (typically an AMEX), but this also includes things like utilities and phone bills.

By responsibly using a mixture of these credit types, you will positively influence your credit score. You don’t have to have all of them at once, but it is good to have them each scattered into your credit history.

This factor may also be scored by the actual number of accounts open. It may seem counter-intuitive, but the more accounts you have open and in good standing, the better your score will be. It’s a sign of high trust!

Bottom Line: Use a mixture of installment, revolving, and open credit at any given time (though you don’t need all 3 at once). Having more overall accounts is also a positive marker.

More About Your Credit History

Finally, your credit history is an average of how long you’ve been utilizing credit. If you don’t have any credit right now, then opening a card is going to be a little bit of a knock to your credit score in the short term.

You’ll have to really utilize the other categories to bolster your score, and it will take time to build. This is why it’s so important to open a card as soon as possible!

In fact, we’d recommend opening a card as soon as you turn 18 years old (or younger with parental permission) so that your score begins to build while your finances aren’t as complicated.

An “average credit age” number is used for this factor, so having a few cards that are older will help your score.

This also means it’s important not to close your oldest accounts! Make sure that when (or if) you decide to close accounts, you always do so strategically.

Bottom Line: You need to start building your credit history now! Open a card or 2 to start “aging” your credit, so that when you open cards in the future it doesn’t affect your score as much.

Part 3 Opening Credit Cards Now
Start by opening a credit card now in order to build your credit. One of the most important credit score factors is the age of your credit, which is a measure of how long you have had accounts open!

So, Here’s the Credit Building Strategy You’ve Been Waiting For

OK, here’s the strategy! Let’s use a little story to make this easier to remember and explain. There are multiple steps, but they can be done in a different order depending on where you are right now.

Step 1: Open a Credit Card!

Ashley is a 25 year old woman from Nebraska. She wants to get into the points strategy world so she can start traveling and see the world outside of Nebraska (which is very, very flat. With lots of corn). Editor’s note: Nebraska is a wonderful place!

Ashley opened her first credit card during her freshman year of college, with a limit of $1,500 (completing Step 1).

Her average credit age is 7 years. Her credit utilization is 10% (she barely uses her card), she has made 100% of payments on time, and she has a mixture of credit types (student loans and bills) that she also pays on time.

What should she do next?

Summary
Credit Score Category Note
Credit History 7 years
Credit Utilization 10%
Payment History 100% On Time
Credit Types (# accts + types) 5 (revolving, installment, open)
Request for Credit (past 2 years) 0
Total Credit $1,500
Credit Score unknown

Tip: Using a no-annual-fee card for your first card is a smart move to ensure you can confidently keep that credit line open without having to pay for it!

Step 2: Find Out Your Credit Score and Your Credit Measurements

Ashley knows she is entitled to a free credit report each year from the credit bureaus, but also knows that it won’t include her score. She supposes she’ll have to pay for one…

But wait! She hears from her friends that most credit cards these days are starting to offer free credit scores as part of their benefits package. So are some personal finance websites.

Hot Tip: If you have one of those cards already, then go check out your score for free!

Ashley’s card doesn’t, unfortunately, and she doesn’t want to spend the $15/month to track her score right now. Instead, she signs up for an account at Mint.com to check her score.

Ashley finds out her score is 650, which is in the low range of “Good” credit. Not bad!

However, whe would like to improve that score and get into the “Excellent” category to maximize her chances for better offers and more travel. Now that she knows her score, she thinks about what to do next.

Summary
Credit Score Category Note
Credit History 7 years
Credit Utilization 10%
Payment History 100% On Time
Credit Types (# accts + types) 5 (revolving, installment, open)
Request for Credit (past 2 years) 0
Total Credit $1,500
Credit Score 650

Tips: The following are some cards and places that offer free credit scores:

Step 3: Determine If You Should Open a New Card or Wait

Ashley’s next step, now that she knows her credit measurements, is to determine if she should open a new card or wait.

She asks herself the following questions:

  • If I open a new card, will that affect my payment history? (35% of your score)
  • If I open a new card, will that affect my credit utilization? (30% of your score)
  • If I open a new card, will that affect my credit history? (15% of your score)
  • If I open a new card, will that affect my types of credit? (10% of your score)
  • If I open a new card, will that affect my requests for credit? (10% of your score)

Her answer to credit utilization and payment history is “no.” Ashley has extra money to spend and can afford to pay an annual fee on a card if necessary.

If she didn’t, she wouldn’t consider adding more credit cards. She’ll always pay off whatever she spends each month, only spending within her budget.

If I Open A New Card, Will It Affect My…
…Credit Utilization? No!
…Payment History? No!

Ashley’s credit history will be affected, she realizes. Opening a new card will bring her average age from 7 yrs to 3.5 yrs. Will that be enough reason to not get a new card?

No, she decides. It’s only 15% of the overall score. Opening a new account will give her a temporary ding here, but she’ll get even more of a boost from her good utilization and payment history.

Eventually, she’ll have to take the hit to build up a little credit history!

If I Open A New Card, Will It Affect My…
…Credit Utilization? No!
…Payment History? No!
…Credit History? Yes, negatively until the accounts age

Hot Tip: The only way to build average credit age is to get cards NOW! The longer you wait, the more drastically you will affect your score, which will only make getting new cards harder and harder.

“What about my types of credit?” she thinks to herself.

Adding a new card can only help. Since Ashley only has 1 credit card but many other loans and bills, she may actually be hurting her score by not opening more cards. She knows that more accounts open will mean a better credit score overall, so decides it’s a good idea for this reason, too.

If I Open A New Card, Will It Affect My…
…Credit Utilization? No!
…Payment History? No!
…Credit History? Yes, negatively until the accounts age
…Types of Credit? Yes, positively

Hot Tip: The more accounts you have open (assuming good standing) the better your score.

“Oh, but I’ll be making a request for credit!” she realizes.

Fortunately, she remembers that this temporary ding of a few points is quickly offset by the positive influence of additional credit types, payment history, and utilization.

Eventually, credit history will boost her score as the account ages. Ashley is satisfied.

“It’s a great time to open a new account,” she decides. She begins to look around for a new card.

If I Open A New Card, Will It Affect My…
…Credit Utilization? No!
…Payment History? No!
…Credit History? Yes, negatively until the accounts age
…Types of Credit? Yes, positively
…Requests for Credit? Yes, negatively for 2 years (minor)

Step 4: Find Out Which Card(s) You Want to Open

Ashley isn’t sure if she should open just 1 card, or more than 1 card. How should she decide?

Part 3 Girl Questioning Cards

First, she asks herself how much spending she can afford on the card. She determines that she has $2,000 per month to spend on credit cards if need be.

Because she knows her monthly spending, she realizes the main factor in opening a new card will be whether or not she can afford the annual fee (in exchange for the benefits) AND meet any minimum spend required to obtain the sign-up bonus.

Hot Tip: Remember, the sign-up bonus is the most important part!

At Ashley’s spending range, she assumes that she can only open 1 card right now, and she decides it will be the Chase Sapphire Preferred® Card. To obtain the current sign-up bonus, she must spend $4,000 in the first 3 months of opening the card.

However, she realizes she has room to spend up to $6,000 right now during that timeframe.

“Why don’t I look at opening a second card?” she thinks. “The more cards I can open now, the better rooted my credit history will be in the future.”

The other card she was interested in also needs a $3,000 minimum spend in the first 3 months, which totals $7,000: more than Ashley can afford right now.

Then, she comes across the Chase Freedom®, and finds she only needs to spend $500 in 3 months to earn a bonus!

She excitedly applies for the cards and obtains an approval.

Summary (Upon Opening 2 Cards)
Credit Score Category Note
Credit History (average of open cards) 2.3 years
Credit Utilization 30%
Payment History 100% On Time
Credit Types (# accts + types) 7 (revolving, installment, open)
Request for Credit (past 2 years) 2
Total Credit $14,500
Credit Score 600

Hot Tip: Opening cards that complement each other, such as the 2 Chase Ultimate Rewards cards in this example, makes for a strong strategy!

Step 5: Meet the Minimum Spend, Pay Your Debts, and Wait

The final step in building her credit, Ashley determines, is simply to use the card responsibly and wait for the positive effects of the card to kick in.

As Ashley begins using her cards over the next few months, she gets her sign-up bonus and begins learning more about her points strategy. She really wants to take a trip to Europe, and the sign-up bonus is enough for a one-way flight!

After 4 months of spending and paying off her card, Ashley rechecks her credit score: it’s now 700! “Wow!” she exclaims, “I can’t believe it went up so much!”

Summary (4 Months After Getting 2 Cards)
Credit Score Category Note
Credit History (average of open cards) 2.6 years
Credit Utilization 30%
Payment History 100% On Time
Credit Types (# accts + types) 7 (revolving, installment, open)
Request for Credit (past 2 years) 2
Total Credit $14,500
Credit Score 700

While individual results will vary, it is clear that by strategically getting a new card, Ashley was able to improve her score. The specific amount of increase is not as important as the strategy itself:

  1. Open your first card
  2. Find out your credit score and credit measurements
  3. Determine if you should open a card or wait
  4. Find out which card(s) you want to open
  5. Meet the minimum spend(s), pay your debts, and wait

Bottom Line: If you follow those steps, then you will slowly find your credit score increasing. Once it increases or you become comfortable with opening a new card due to expanded resources, you can move on to Step 6.

Ashley decides that she really liked getting that sign-up bonus, and she’s ready for more!

Step 6: Re-Evaluate Your Finances and Credit Score, Find a New Card, and Repeat

Ashley sees now that this strategy can work, especially if she continues to implement the strategy on a regular basis. Since she already rechecked her score (Step 2), she moves on to the next step.

She first re-evaluates her finances and realizes that she can afford another annual fee as long as she gets the right benefits.

Again, she asks herself the questions about her credit score and realizes it’s a good time (Step 3), so she sets off to find what card she can open next.

Because she wants to take that trip to Europe, she looks for other ways to reach this goal. During the time she’s had the cards, she finds out it’s great to transfer points to airline partners for international flights.

She looks for another card she can use to transfer airline miles to a partner shared with Chase Ultimate Rewards.

Hot Tip: Having your strategy in mind is key to figuring out which cards to open!

A card she likes is the Starwood Preferred Guest® Credit Card from American Express, because SPG also partners with British Airways. The sign-up bonus is enough to pay for her return flight, so she can transfer that and her Chase points into her BA Executive Club account and book flights!

With this card, she also gets some privileges in Starwood hotels if she stays at their properties, and gets great benefits like free Boingo WiFi worldwide, which will be perfect for Europe!

To open the card, she’ll have to spend a total of $3,000 in the first 3 months, which is within her budget.

By opening this card, she can get an additional boost to her credit score in the following ways:

  • Opening a card gives her a much larger pool of credit
  • Her types of credit and number of accounts increases
  • Additional boosts through utilization rate or payment history

She also realizes that to get these boosts, she has to take the following temporary negative hits:

  • Credit inquiries: another inquiry will drop her score by a few points and won’t go away for 2 years
  • Credit history: her average age of credit will go from 2.6 to ~1.9. This is a big hit, but again it is a good foundation to lay for later cards opened. Payment history and credit utilization will work to balance it out.
Summary (4 Months After Opening Her Fourth Card)
Credit Score Category Note
Credit History (average of open cards) 1.9 years
Credit Utilization 30%
Payment History 100% On Time
Credit Types (# accts + types) 8 (revolving, installment, open)
Request for Credit (past 2 years) 3
Total Credit $19,500
Credit Score 650

For now, she has taken a hit, but she has her sign-up bonus and future trip in sight, and Ashley knows that her credit will now start building up again.

Reviewing the Credit Building Strategy

Fast Forward: Results of Implementing Ashley’s Strategy

After opening the cards, making the payments, and generally being responsible with her cards and all her other types of credit, Ashley is very happy with the awards she has earned. She took her first trip to Europe!

Ashley had a great time in Berlin and Paris. When she got back (6 months after opening her last card), she saw that her credit score was now around 720.

Looks like it’s time to start again! Ashley’s next goal is to visit Asia. She begins searching for ways to get there and cards that will match that strategy.

Bottom Line: Having a goal and implementing a strategy carefully around that goal is the best way to begin building up strong credit, taking trips, and positioning yourself for future travel!

Summary: How to Improve Your Credit Score Steps and Tips

Hopefully you understood the example and can now see how managing your credit is very important. Managing your credit well can mean you get great travel rewards and improve your score as you go!

Here are the 6 steps to improving your credit, consolidated in single list:

  1. Open your first card
  2. Find out your credit score and credit measurements
  3. Determine if you should open a card or wait
  4. Find out which card(s) you want to open
  5. Meet the minimum spend(s), pay your debts, and wait for your score to balance out or improve
  6. Repeat steps 2-6

Some quick tips on managing your score:

Credit history is the toughest one to begin! At 15%, it can be a bit of a daunting hit to your score.

However, by NOT opening enough new accounts early in your strategy, you severely affect your ability to get the “snowball effect” on your score and continue to earn better and better rewards over time.

If you have 5 old accounts and open 2 new ones, your score will be much less affected than if you have 2 old accounts and try to open 5 new ones!

Pay off all your debts each month on each card, as well as in all of your other types of credit! Remember that your credit score is not just measuring your credit cards, but auto loans, some bills, and more.

Don’t let any accounts go delinquent in the name of trying to earn points.

Remember that the points are of marginal value compared to the amount of interest you would pay or the hits to your credit for not making a payment!

Keep your utilization low! At first, you may be tempted to put EVERYTHING on your card, but that may hurt you more than help you. Keep your utilization rate low until you have a good solid base.

Requests for credit stay on your report for 2 years. If you open up 10 cards at once, you’d have a HUGE hit to your score (20-50+ pts) all at once and it would last 2 years.

After 2 years, assuming you didn’t open up any new accounts, you would see a big boost back to your score.

Use this fact to your advantage. A few points here and there can add up: if you open 3 accounts every quarter and each causes a 3 point hit to your score, in 2 years you will have lowered your score by 72 points!

Final Credit Building Thoughts

Opening 3-5 cards is a safe bet in your first year: 2 in your first quarter, then 1-2 each of the next two quarters. Make sure your score recovers in between before opening up new cards. After reaching 3-5, let it sit and build up for a bit; you’ll notice it will go much higher!

Once your credit base is solid, you could safely open a card every quarter or every other quarter without taking too many hits. Just keep watching your score, and if it hasn’t recovered yet, give it extra time until it does.

Finally, while we truly appreciate any cards you open through our links, remember that any pre-approved offers you have are a bit safer!

Part 4: How Loyalty Programs Work (& Why You Should’ve Already Joined) >>

Photo Credits/Credit/Copyright Attribution:
Credit Report Featured Image: danielfela/Shutterstock
Trust Blocks: Gustavo Frazao/Shutterstock
Woman Fanning Credit Cards: Bacho/Shutterstock
Girl Contemplating Choice: Odua Images/Shutterstock
Chase Sapphire Preferred® Card
  • Earn 50,000 bonus points after you spend $4,000 on purchases in the first 3 months from account opening. That's $625 toward travel when you redeem through Chase Ultimate Rewards®
  • Named Best Credit Card for Flexible Travel Redemption - Kiplinger's Personal Finance, July 2016
  • 2X points on travel and dining at restaurants worldwide & 1 point per dollar spent on all other purchases.
  • Earn 5,000 bonus points after you add the first authorized user and make a purchase in the first 3 months from account opening
  • No foreign transaction fees
  • 1:1 point transfer to leading airline and hotel loyalty programs
  • Get 25% more value when you redeem for airfare, hotels, car rentals and cruises through Chase Ultimate Rewards. For example, 50,000 points are worth $625 toward travel
  • No blackout dates or travel restrictions - as long as there's a seat on the flight, you can book it through Chase Ultimate Rewards
Apply Now Full review