Proof that credit card churning helps my credit score

When I tell people that signing up for credit cards allows me to fly around the world in first class for next to nothing, I typically get one of two reactions. Either “wow, that’s so awesome, sign me up,” or “well that’s nice, but I value my credit score far too much to ever do that.”

I tried to debunk myths regarding credit scores in this TravelSort post, though even when I link people there, some are still skeptical. The main thing I always remind people of is that only 10% of your credit score is made up of the number of new credit requests you make.

That being said, I think I finally came across a tool that illustrates how credit card churning has helped my credit score. I signed up for a free trial with freecreditscore.com (I get a small bonus if you sign up for anything beyond the free trial), and they have a pretty useful “Score Center.”

Here’s what my credit score looks like right now:

The cool thing is that the website lets you fool around with various aspects of your credit behavior to see what impact they would have on your credit score.

I already have the maximum number of inquiries in their drop down menu (7+), so I was curious to see what would happen if I only had 1-2 inquiries in my report. Here are the results:

So yes, my score would go up by nine points if I only had 1-2 inquiries.

But fewer inquiries would probably mean fewer credit cards, and that would probably mean a higher credit utilization ratio (since I’d be spending just as much money, but my combined credit lines would be much lower). I believe the current reported 2% credit utilization ratio is way lower than it actually is. So let’s see would would happen if my credit utilization were 30-50%, which is still reasonable and probably where I’d be if I only had 1-2 cards:

That’s right, my score would drop by 13 points, compared to an increase of just nine points with fewer inquiries.

Admittedly this calculator probably isn’t scientific, but I think the idea is clear. Credit card churning doesn’t ruin your credit score, and in many cases even helps it. Your decreased credit utilization ratio can more than make up for the additional inquiries.

I value my credit score (and wallet) too much not to sign up for credit cards when the bonuses are right.

Comments

  1. Your test at 30% utilization appears to have been run at 7+ hard pulls. Everything else being equal, if you ran it with 2 pulls it would probably show a net decrease of 5 points. Also, not sure if your assumption that your utilization would jump from 2% to 30% plus is supportable.
    .
    More interesting is the fact that this test seems to treat any number of inquiries after 7 in the same bucket. If that’s really how these things are calculated (and I have no idea if that’s accurate) then once you reach 7 hard inquiries there’s NO net benefit to your credit score in NOT accruing additional inquiries — it no longer matters. (Of course, you can still get declined for too many inquiries, but you’re not damaging your credit score per se).

  2. My understanding on this also is if you have a good credit score like yours is already the inquiries don’t hurt that much. However if someone has a lower score like me each inquiry can have a 10 to 20 point effect on my score.

  3. @ LarryInNYC — Right, and the point was that the impact of a low credit utilization ratio is greater than the impact of several inquiries. If I ran the test with a very low credit utilization and few inquiries, that wouldn’t be all that significant since I couldn’t achieve such a low utilization ratio without more inquiries.

    @ Mark — There’s no doubt that one’s credit score impacts how many points you get docked for a new inquiry, but I can’t imagine a new inquiry would dock you 10-20 points. I’ve heard at most two, and as you can see in my case, it’s even lower.

  4. IIRC, anyone can control their utilization rate simply by paying down any balances before the statement closes, as my understanding is that the balance on the statement is what’s used to calculate the utilization?

  5. So you found a website that has its own score formula (that isn’t used by any lender), that gives you an arguably interesting result on their calculator? Good job. Oh, right – you get a referral bonus.

    Also, there is impact to average credit account age due to accounts, which is larger than 10% of the score (at least the entire “category”).

    Sure, most people do overestimate the impact of getting new cards – it really doesn’t change a score significantly in either direction. However, the primary reason for that is poor udnerstanding of how scoring works in general. Your post certainly doesn’t help with that.

  6. Great post! I use Credit Karma, which is free for all members (not just a trial) and it also has a simulator that has nice explanations for changes to your credit profile. I used the simulator and noticed that by adding a new card with a few more credit inquiries, that my credit score would still improve.

  7. @ Mario — I believe the utilization ratio is based on the average balance and not the balance at closing, though I could be wrong. So you definitely could always pay down your balances almost daily, though I think for most people that’s pretty impractical.

    @ oleg — Easy there. First of all, I don’t get a referral bonus unless anyone buys anything (and I don’t recommend anyone buys anything on the site!). Second, like I said, it’s not scientific. My point was for illustrative purposes. Most people think signing up for credit cards completely ruins your credit score. Others think it at least worsens your credit score. My point was simply that it *can* help your credit score. I think the TravelSort post was useful in laying out the facts, though many had a hard time believing that signing up for credit cards doesn’t necessarily hurt your credit score.

    Like I said, the above illustration isn’t scientific, though I think it’s a useful and easy-to-understand point.

  8. Your credit utilization should stay near 0% as long as you’re paying off the balances each month. At least, that’s what Credit Karma was showing me even though I knew I had $10K or so spread across a few different cards.

    Even if it did go higher because you’re putting the same spending on fewer cards, my immediate response would be to make interim payments so that you never get near 30%.

    Rather than use a calculator, I think the better metric is actual credit scores, and so I still agree with you that churning can help improve your score. Mine has gone up at least 20-30 points in the last year since I started.

  9. caveats:
    a) this is not real FICO
    b) there are different kinds of FICO used for different reasons. Mortgage FICO is not the same score as your Auto FICO. Two different scores, tallied in different ways for different purposes. So, if the sole purpose of your entire life is to churn the CCs, then fine. But if you expect to churn and expect banks give you that car and mortgage without any questions or problems or points, you are in for a surprise.

  10. I’m all for educating everyone interesting in credit scoring; however, there are better ways to do it :). Your travelsort article is reasonably well writen – this however is tabloid material at best. You can do far better.

    Their scoring system really can’t be used for anything other than determining good versus bad credit ratings. Even anecdotally this doesn’t show that a credit score can improve after an inquiry. (A dubious hypothesis also. I’ll easily buy that there may be zero change, but not a positive one. At least assumign we’re talking about one of the FICO formulas, or even a reasonably refined offshoot.)

    Referal bonus only if someone buys there is as good of a reason as linking to a credit card application and saying you only get a bonus if someone gets approved. It still seems suspect of being the primary motivation.

  11. Lucky – I think the bottom line is that additional CC applications do lower your score initially, but may raise it long term due to lower credit percentage utilization. (My overall credit profile is strong, but several years ago, after heavy churning, my score dropped from 780 to 750. I’ve been much more careful ever since. YMMV.)

  12. The URL appears to indicate that you get the referral. Is this the case? Not to be a jerk, but I appreciate it when bloggers indicate their… business relationships with the products/sites they recommend.

  13. I completely agree. In less than a year, I went from not having a credit report to having a good credit score 750 that I can get approved for most of the cards:)

  14. Lucky- I’ve also hit a wall many times when telling people it won’t hurt their credit score, so I appreciate the effort you went through to illustrate it here. I’ll also point them to your Travelsort post. Thanks for the post!

  15. I’ve experienced that very phenomenon. I’ve systematically raised my credit score 35 points from 750 to 785 by adding more cards. The big kicker was getting approved for $20k on a chase united card significantly increasing my available credit. That one was 15 points by itself….

  16. Mario above is mostly correct about balances. Nearly all cards report your statement balance to the CRA. They don’t necessarily report on the day the statement cuts, but even if they report a day or two later, the number they will report is the number that was on the last statement. So by paying your balances before the statement cuts, you can control what appears on your credit report.

    There are a few card companies that will report the end of month balance. I think some of the HSBC cards are like this (used to be like this?). The few that do this have been converting to the standard that everyone else uses, which is to report the statement balance.

    Pretty easy to verify if you have a current report. Just compare the balances to what was on your last bill.

  17. And just to further clarify, the utilization ratio is calculated using the numbers on your credit report. And since it is the statement balance that is on the credit report, this is why it is statement balance that is used to calculate utilization.

    There are a few additional wrinkles with this as well. Charge cards/open accounts do not count in utilization on Equifax and Experian. TransUnion98 (version you get on myfico.com) does factor them in, but I think TransUnion04 ignores them. People with CCs with really high limits, over 40K or 50K, can’t remember exactly where the cutoff is, have those accounts ignored. The reason they do this is so that revolving lines like HELOCs don’t cause you to be maxed out all the time. Visa Signature and MC World cards are treated differently depending on whether they report a limit or not.

  18. Dan is right.

    This score being high or low won’t matter to a loan officer at a bank – you will have to explain all the pulls if you want to buy a house, etc. (I think they go away after 2 years).

    As long as you do them all over a short time frame, you can explain it away as looking for the best offer (I guess you could probably even explain your real strategy).

    So, yes it doesn’t hurt your score in that you will still be able to get good credit card offers, etc., you may have to pay more interest on a car or home loan.

  19. Also the length of time you have the credit is very important, so all these cards you open up, you need to keep indefinately. Each one you close will bring your average down. Then you have all this open credit sitting out there. You need to prune periodically by requesting them to back down your credit or it will work against you.

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