Credit Report and Credit Score (mostly by FICO) are key factors in approval of credit cards. For credit cards owners, it is very important to know about their Credit Reports and FICO Credit Scores. We have talked about several ways to get free Credit Report and Credit Score in How to Get Free Credit Reports And Scores. The next question is: how to improve Credit Score? We will talk about it in this article.
First of all, we need to understand the key factors affecting Credit Score. Below is an introductory page from Discover, from which we can learn about what affects Credit Score and how important they are:
- Payment history. This is quite straightforward: just pay your credit cards on time. You can set Automatically Payment in case you forget. You can find this option on all online banking webpage. We strongly recommend you to pay full statement balance instead of just minimum due, otherwise you need to pay interests for the amount you owe.
- Amount you owe. It is also called utilization, which means the ratio between total balance (of all credit cards) and total credit limit (of all credit cards). It would be better keep utilization between 1%~10% if you want to improve your credit score. Some says there will be negative effects if the utilization ratio is 0%, but some say there won’t. We haven’t found any official statement about that yet. It doesn’t mean you cannot use you credit cards much if your total credit limit is too low because what matters is the statement balance, not the balance before statement. Actually, there won’t be any problem if you make some payment before statement closing date, making the utilization under 10%. Besides, utilization is an overall ratio across all credit cards, which means you don’t have to maintain a low utilization on every single card. Actually, it may be better to keep statement balance above 0 on only a few card because we’ve seen some official bank letters saying that a negative factor affecting Credit Score is “too many accounts with balances”.
- Length of credit history. There are two data included: one is the length of your credit history, which is from your first credit card; the other is the average length of credit history over all of your cards. We don’t recommend closing your first credit card since that will lower your average credit history and hence Credit Score a lot. Keeping your earliest few credit cards open are also very important, so we recommend you to apply for credit cards with no annual fee at the beginning and keep them open.
- New credit opened. It is mainly the numbers of new accounts and Hard Pulls. Hard Pull refers to the inquiry for your credit report. There will be one (or more) Hard Pull when you apply for a new credit card or a loan, whether approved or not. Every Hard Pull is kept for only two years. More hard pulls usually mean you want to borrow more money (at least the bank thinks so), so Hard Pull lowers Credit Score. Thus you’d better not apply for credit card with few benefits. Even for credit cards with top offers or worth keeping, we still recommend you to better apply for them abstemiously and step by step. How important is the number of Hard Pulls? Answers vary a lot from bank to bank. Here are some examples: if you have six Hard Pulls or more within six months in Citi, it is of high probability that your application will be declined automatically regardless of your Credit Score; if you apply for two cards within one day in Barclay, it is of high probability that the second applications will be declined regardless of your Credit Score; AmEx and Chase are mostly not very sensitive to the number of Hard Pulls…… For more details, see Characteristics of Major Banks.
- Types of credit you own. If you have credit cards as well as auto loan and mortgage, it will improve your Credit Score. However, you don’t need to apply for loans only for your Credit Score. Just let it be.
Some useful tips:
- Your applications are more likely to be rejected if you have short credit history. You should make cautious move within six months since your first credit card, or Credit Score will be lowered by meaningless Hard Pulls for nothing. People with no credit history may still get some credits cards like Discover it, Citi ThankYou Preferred for College Students, Chase Freedom, BoA Cash Rewards, see Credit Cards for No Credit History for detailed information. AmEx Everyday is a pretty good rewards card that you can try to apply for after three months of credit history. As for the rest, you’d better consider them after your have more than six months of credit history.
- If you are considering applying for several credit cards, you’d better applying for them in the same day. The reason is that new accounts need some time to be reported to Credit Bureau, so if you apply for more than one cards in the same day, banks cannot see the other new accounts, which can increase your chance to be approved. Please note if you apply for several cards of the same bank in one day, your latter application may be rejected automatically, see Characteristics of Major Banks for more information.
- Hard Pulls within six months has higher weight than previous Hard Pulls. So a credit card application strategy is to apply for several credit cards on the same day, and repeat every six months. Or since most spending requirements for sign-up bonus are to spend a certain amount of money within three month, you can apply for a few cards every three months.
- Sometimes you may find some credit cards advertisements titled with Pre-qualified and Pre-approved in the mail boxes. Please note they are just advertisements!!! While applying, Hard Pull is still necessary, and rejection is still possible. Don’t be fooled by those words.
- When you have kept a good credit record for about one and a half years without any big problems, you don’t need to care about your Credit Score too much then. At that time, it is not hard to get almost all common credit cards that are public available. But please note that your application may be instantly rejected if you have too many Hard Pulls in a short period of time. For more details, see Characteristics of Major Banks.
- Many people use Credit Score from Credit Karma, but sometimes Credit Karma can be very inaccurate since they use different models from FICO, which is used by most banks. So Credit Score from Credit Karma should be used for references only. Update: Credit Karma has changed its model (added with Equifax Score), which seems to be a bit more reliable than the former one.
- What happens if I close a card after getting the sign-up bonus? First of all, you should be aware that closing a card won’t affect Credit Score directly. There is no factors directly related to closing a card in the FICO model mentioned. However, indirect effects exist. For example, the average length of credit history can be shortened due to closing. Also, lowered total credit limit may raise utilization if you don’t pay attention to it. In short, indirect effects exist but are tiny. That’s why quite a lot of people close cards right after they take all the bonus and they can still be approved for new cards.