Dr.milology

I've seen this question posted before; however, it seems like everyone has a different answer. So I thought this might be a good topic to set out there in order to get some truth in all the different speculation. If a person has great credit, never carries balances or incurs finance charges of any kind, what, if any, are the effects of applying to many mileage credit cards and then canceling them once bonus miles are awarded?

I've seen many articles written by creditors on the subject and they all seem very vague. They all suggest that it may effect credit. Has anyone had any real experiences with this or has had their credit score hurt by applying to and canceling too many credit cards?

Loran

Check out http://www.myfico.com/CreditEducatio...YourScore.aspx

This web site is by the company that created the credit score (Fair Isaac). They've never released the exact formula for how they come up with the number, but they do provide some detailed information. It looks like the number of new cards is a small factor.

Some of the major credit reporting agencies, and maybe myfico.com, will let you "play" with your credit score after you buy it from them. So you can adjust the number of new cards you have and see what happens to the score.

mahasamatman

Welcome to FlyerTalk.

The Motley Fool has good information on how the FICO is calculated. They generally indicate that such a pattern would drop your FICO score anwhere from 20 to 80 points (or maybe more depending how many credit cards you apply for), as lenders would see this as an indication that you are trying to run up your available credit. Closing those accounts will not instantly restore your credit. In fact, if you have debt elsewhere, closing those credit cards could actually hurt your credit score, as your ratio of debt to available credit would increase.

pdxhawk

Here's a FICO score estimator. I've played around with it and varying the number of cards/applications doesn't seem to affect the estimated score. Of course, this is just an estimate.
http://www.bankrate.com/brm/fico/calc.asp

Marysunshine

I must have gone through 10-12 credit cards in the last two years easily: Citibank gold and platinum and business: two Milage Plus Visas: Delta business card, etc. It did not affect my score at all. I pay all my bills the minute they come in, never charge more than the allowed credit limit on a card, and always wait to cancel a card so it doesn't look like I did it for the miles!!

michaelr

I did subscribe for a trial 30 days with one of the credit score monitoring companies. A couple of credit card apps hurt my score by 20 but it recovered within 30 days. I always pay my cards on time, never over the limit, always cancel them within 4-6 months, hardly ever make more than one purchase on a churn card.

Dr.milology

Thanks for the information everyone. I guess it's safe to say that a little dent in an excellent credit score rating is worth the miles. The fico score estimator was interesting! Outside from actually flying and spending money on a card, it seems like credit card bonus miles are the best option for gaining miles.

Marathon Man

I actually learned a tiny bit about something called DEBT TO CREDIT RATIO...

When someone has, say 3 cards with say, $2500 max limits on them, and let's also say they are new to the game and so they cannot really get more than about $8,000 in credit anyway... Now, if they cancel one of these, they just freed up $2500 of their "available" debt that they can have for themselves...

So if you cancel a card it's not always a bad thing. Also, if you do so, just keep notes on why you did so. It may say CANCELED AS CUSTOMER REQUEST on your credit reports. You can also write a max. 100 word statement about your own issues that can go into this report. It is a bit of copy editing and I know that of the 3 main Credit Reporting Bureaus, Equafax makes it harder to write this statement that the other 2. You have to go back and forth with them til they accept what you wrote. They wont tell you how to fix it, but they will tell you when it is wrong. They suck like that, but so be it. I was told to take it up with the FTC. I did.

BTW, the part about the writing my 100 words, I did that part. My limits of credit are higher than just $7500 but that is an example.

Hope this helps someone/

MM

TrojanHorse

I just did this and I don't believe anywhere it asked about my income... doesn't Income play a big role in your score. I mean.. if you have $5000 in debt (out of $6,000 available credit) but make $500K annually, your score can't be that bad.. assuming you pay it timely etc.. but If I have the same $5000 debt (with the same $6,000 in avail credit) and $10K annual income and make the minimum payments and lets say its a 25% interest rate.. how can I have a the same score

GUWonder

Income playing into the score makes sense .... unless the score is calculated merely for predictive value that lets a particular creditor know what the likelihood of an individual is to pay off debt in a timely, predictable manner regardless of circumstances (even quite substantial circumstances like significantly higher income).

Wait.

Since the creditors are the one's who care about the score and all they care about is behavior (not max. potential capability), then it makes sense that income is less a factor than the historical reliability of a party to service their debt. [I do know some high income individuals who have some really lousy FICO scores. No small slice of entrepreneurial and finance types seem to be in this predicament at some point in their life.]

Perhaps realized and/or predicted changes in income should factor into scores more than income itself?

I have a question about the following scenario:

A person has 4 credit cards:

Card 1. Max credit 40,000; 0 revolving balance; used and paid each month.
Card 2. Max credit 75,000; 0 revolving balance; used and paid each month.
Card 3. Max credit 10,000; 0 revolving balance; used and paid each month.
Card 4. Max credit 3,800; 0 revolving balance; used and paid each month.

A. If they close the Card 3 account and open 1 new account, will there be any dent on the credit score?
B. If they close Card 1 and open 3 new accounts, how extensive will the dent on the credit score be for a high FICO score individual?

Marathon Man

hmmm, your example person looks a lot like me (only with smaller max credit limits) when spinning those good olde Charter One gift cards a while back. I mean, even if I did carry a bal in some areas at times, I paid off what was due each month on paper and so it never mattered anyway--and I always had $0 owed at the end of each statement! I earned uber mileage to boot!


As for inclome, mine is lower than I'd like it and there are bills due, and yet I am being approved left and right for home loans in case we buy. Got a preapproval letter just the other day in fact, and it should not have been that high as far as I could tell! BUT they wanna loan you money these days, I guess. Who knows how the credit wheel spins? Sometimes I think even they don't.

As for getting credit when you are new (or when you may have just moved here from another country) I found that some banks let you set up a CD to which you make payments each month, and in this process, you gain a credit history. After just 8 months of paying about $90/mo, my friend from Europe was able to get the Amex Starwood card and a United Visa! Granted, their savings helped, and a marraige status to a US citizen may have also helped, but other than where they reside (towns matter to creditors) and some job history stuff with an OK income, I cannot figure out how that all works.

MM

l etoile

You'll find lots of good info on this at www.creditboards.com

FICO scores are interesting. More lines of credit may improve one person's credit score and may harm another's. It's dependent on many, many factors. Cancelling the cards may or may not be in your best interest (your score may be improved by keeping them open and not using them, where as it may be the opposite for someone else). There's not a blanket answer to this, but you'll find on the creditboards website that a lot of people have monitored FICO's very closely and have made info available that may help you better predict what might happen to your own score. Keep in mind the credit checks from applying for multiple cards in a short amount of time may be somewhat of a problem too.

Family flyer

This is not quite right. You do not create available debt by cancelling cards. Paradoxically, you can improve your score by having more cards. One part of the FICO equation is the ratio of debt to available credit. For example, you charge $5K/month on one card with a $10K limit. Your debt to available credit ratio is 50% (5K/10K), which is high.

If that same person charges $5K on a card with a $30K limit (or several cards with a $30K combined limit), the debt/limit ratio is 16.7%, which is much better. Creditors like the debt/limit to be as low as possible.

In addition, another factor used is average age of accounts. If you open and close accounts, your average age of accounts decreases. On the other hand if you open an account and don't close it (even if you never use it) the average age increases. You would do this with credit card accounts that don't have annual fees.

These are only generalizations. If you open and close one or two accounts, your FICO won't fall apart.

In reference to the comments about income, the first observation is correct: FICO does not consider income. The implication is that if you carry X amount of debt and are paying it off you have adequate income.

Dr.milology

Wow, lots of information on credit! So I guess, there is not to much to worry about by loosing a little credit by opening and closing a bunch of cards if in the short term, my credit score is of no concern. (As long as it doesn't go way down for something other than opening and closing accounts.) And if I ever do look to buy a house or take a big loan out, I should just give my credit score some time to bounce back. Does anyone agree with this? Thanks again for all the information!

themicah

Dr. M I think you're pretty much on. I can't imagine you'll hurt your score too much by "churning" a few accounts, and even if you do, it should only take about a year to bounce back. Just be sure you're not going to need your credit score for anything big like a home loan in the next year or two.

I think churn is a relatively minor factor compared to things like ratio of debt to credit, total length of history (keep your oldest credit card open), and whether you've missed payments or had anything go into collection.

Missed payments and bills in collection are the biggest negative factors.

One other thing to remember with the ratio of debt/credit is that the ratio of total debt to total credit matters, but so does the ratio on individual accounts as of their last statement. So, for example, I took out a 0% card a year or two ago, transferred balances from my mileage cards to max it out, and payed only the minimum payment for a year. It was a nice free $14k loan for a year. But during the year while I was at >90% of my capacity on that card, my credit score was significantly lower than before I opened that account or after I paid it off--even though I was only using about 20% of my total credit capacity. The score bounced back a couple months after I paid off that card, and now it's very high.

The same thing would happen temporarily if you bought a $10k item on a card with $11k credit line. They measure your credit based on your most recent statement for each card. So even if you paid off that $10k bill a week after your statement, your score would be impacted until the next statement (Showing that you owe $0) issues.

One of the most informative articles I've read on this subject, btw, is here:

http://moneycentral.msn.com/content/...ing/P38052.asp