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If you are new to travel rewards, you essentially sign up for travel cards so that you can claim the 50,000-100,000 point sign up bonuses which are typically worth $500-2000 each. The bonuses are earned by putting your normal spending on the credit card over the 3-4 months after your application is approved.
For example, the most highly recommended travel card, the Chase Sapphire Preferred, currently gives you 50,000 points (valued at $1,000), when you spend $4,000 on their card within the first four months that you own the card.
This is an absolute no-brainer for people who are responsible with their cards! For those that are still working to get a handle on their finances, I would first recommend you use the tools on our resource page.
Before I go further I should mention, there are many myths about acquiring a high number of cards and the associated negative impacts to credit score. The reality, however couldn’t be farther from the truth. In actuality, practitioners all find that your credit score actually improves your credit score over time! Keep reading and you will see how and why that works.
In his Financial Peace University course, Dave famously teaches his students to cut up their credit cards and their credit score is an “I love debt” score.
A FICO score is an “I love debt” score. Break up with FICO for good and start living without credit. You don’t need it!Dave Ramsey
Dave shares that his personal credit score went to zero after many years of having no credit history. In contrast, after seven years of no credit or loans, we found that our credit score dropped below 600, which put us out of range of the travel rewards game.
Now that you understand where we were coming from, we can share the strategies we applied that took our post Dave / sub 600 score to over 750!
The five steps to better credit scores
1. Track progress using free credit alerting apps
First off, long gone are the days where you should order annual credit reports, pay the credit bureaus for access to your information, or to freeze your credit. Nowadays, there are free apps and services that provide real-time credit monitoring.
Personally, I use the free CreditWise by CapitalOne mobile app which also serves the purpose of tracking your credit score history, monitoring the dark-web for ID theft, and providing useful information about the makeup of your score.
Alternatively, Mint provides free weekly credit score updates. However, you do not get the additional benefits CreditWise offers.
Take action: Sign up for free credit monitoring at CreditWise by CapitalOne
2. Make payments on or ahead of time
In the below image, you can see my personal on-time payments record. Below that, the CreditWise app shows how on-time payments impact credit scores. In the gray text, you can see it says “High Impact on Score”. In contrast to the other score areas, you’ll see that the requirements are quite steep: Less than 98% on time payments is considered average, sub 90% is below average!
Take action: Set up automatic payments on your credit cards, bills and loans to ensure they are paid on time or early. For any online bill-pay items, I recommend you set checks to arrive 3-5 days before the bill is due to ensure it is received an processed before the due date. Maintain positive payments for seven months and you will see a rate-able improvement in your score.
3. Actively manage your debts and ratios
You can control what creditors report to the credit bureaus each month. Furthermore, a seldom know fact is your credit score is entirely based on your credit status on a single day each month. The bureaus typically receive a report from each of your creditors on or around the 25th or 30th of each month.
You can do a little research or call your provider to determine the unique dates for your loan or credit issuer. With this information in hand, you will want to pay down loans strategically and for the express benefit of improving your score.
For example, you can see in the below chart that any time your total card balance gets above 30% it hurts your credit score. Consequently, you should be sure and pay off balances to drop your credit debt below this percentage before the reporting date for your creditor. This is because credit utilization represents the highest impact metric affecting credit scores.
Pay down your credit balance strategically to significantly improve your score. If you have a high credit card balance currently, you can use the following tip to vault your credit score up: Pay off 40% of your current credit card balance within 60 days. Alternatively, you can pay off a third of the balance each month for three months. Both approaches will signals the FICO algorithms that you have the financial wherewithal to handle the debt. Your score will increase accordingly.
Maintain a small balance of 10% to boost your credit. This one seems counter-intuitive at first, but remember, your credit score is an indication of your credit worthiness. To creditors, you are more valuable if you hold a balance and are paying them exorbitant fees. This is an approach that I used a couple of times, early on, as I was rebuilding my credit. There was a noticeable improvement for the months that I did this. In general, however you should always maintain a zero balance.
Take action: The ratios that are reported to the credit bureaus are important to manage. Pay your credit card to your target percentage ratio each month before the reporting date and watch as your scores rise!
4. Avoid excessive credit inquiries
Contrary to popular belief, the number of inquiries on your credit bureau report has a relatively low impact on your score. This is important to internalize because a key part of our strategy, as travel reward seekers, is opening vast amounts of credit cards to claim the sign up bonuses!
Credit inquiries that fall within a 14 day period are usually considered as one. However, if your score is sub 720 you should avoid shopping companies, giving them all your information. Each time you do, they’ll run a credit report and shop you out to other loan servicers and consequently lower your score.
We opened eleven cards in the last year
Over the last year alone, my wife and I have opened 11 new credit cards in my wife and my names. Despite that, our credit score continues to climb. As you can see below, the number of new accounts has a relatively low impact on credit scores.
Similar to the inquiries topic, if your score is sub 720 you should focus on your travel rewards strategy and avoid extraneous new accounts. When you open a new account, your score temporarily dips a couple of points.
Long term, however as your available debt climbs it positively affects your score as well as improving your debt ratios.
Take action: If your score is currently sub 720, you should limit new credit applications to cards on your next up travel card list. This ensures you are more likely to be approved for new cards and your score will keep climbing. For the best travel card recommendations, see our travel page.
5. Give yourself time for your credit to grow
These are the exact strategies we applied to raise our post Dave Ramsey credit score from the 600 range to now approaching 800. We saw an immediate improvement in the first month. Additionally, a moderate improvement in each of following two months. Since then, we have enjoyed a steady increase in our credit score.
What you can expect
In general, you should expect a big change in credit score in 3-6 months. With each credit card we opened, we saw a momentary drop of a couple points, followed by a sharp increase the following month as my available debt increased with each new card. Overall, since we re-applied for credit, we have seen our score increase by more than 170 points.
In summary, you can see in the below chart which factors have the biggest impact on your credit score. Use these methodologies and in no time you will build your credit score up to a level that will gain you access to the amazing world of free travel!
Take action: Visit our travel page and sign up for your first travel card. If you are building credit you might start out with one of the non-premium cards.
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