A lot of times I get the question around my credit score when I talk about how many credit cards I have. Doesn’t it hurt your score to have many cards and inquiries? In general, the answer is no. When I started to apply for more credit cards my score was in the low 600s. That is not very good. As of this post, my score is around 770. Read on to learn more.

Credit score calculation and how it works is the big mystery for many people. It doesn’t help that there is a lot of misinformation out there. Most likely, you will also have a friend or family member that will tell you “exactly” how it works, but is probably dead wrong. In this post I want to go into detail on how scores are being calculated. Throughout the post, I will be providing real life examples of my score to hopefully make it easier to follow. These pictures are taken from Creditkarma, a free service that can help you to keep track of your score. Based on my experience, I found them to be pretty accurate.

Your credit score depends on multiple factors

To start out, I want to share a graphic on the five components that make up your credit score.

As you can see, the components will have different impacts on your actual score. Let’s get into the detail on each one of them.

Payment History: 35%

Are you paying your bills on time every month? Then, you are in luck and in good shape as you have the biggest piece of the pie covered. Otherwise, the title says it all. Possible lenders are looking to see if you are a good borrower. They want some security that if they extend credit, a loan, or mortgage to you, then, you will eventually be able to repay them. Specifically for credit cards, you want to ensure you are paying off your statement balance in full to avoid any major interest charges.

Alex’s example: My history shows I am at 100% of on-time payments. Therefore I have this very well covered. All our accounts are set up for autopay, so that we are not running the risk of missing a payment.

Pro Tip: Should you ever miss a payment, banks are more than happy to waive any fees or erase the reporting if you call. Try not to make a habit of this and don’t expect them to do it month after month.

Credit Utilization: 30%

This one might be counter-intuitive to many people and is one of the biggest urban myths. Lenders don’t like to see borrowers that are close to maxing out the limits extended to them. Therefore, you actually want to keep the actual utilization low to show that you are responsible with your credit and aren’t consistently relying only on credit. High utilization raises the risk that you might not be able to pay everything back. Keep in mind these are computer algorithms. They don’t know you personally and how responsible you might be. Ideally, you want to keep your utilization under 30%. Meaning, for all of your available credit cards, if you have a total credit limit of $10,000, you don’t want to have a balance greater then $3,000 at any given time.

Alex’s example: My utilization is usually below 10% and again have this well covered. Since I have multiple credit cards, the overall credit extended to me is higher and generally helps with this. However if one particular card is high it might still have a negative effect.

Pro Tip: This item can change month over month and can cause swings in your score. If you’ve had some major expenses in a month, your score might drop because of this, but generally recovers within a month or two if your utilization drops again.

Length of credit history: 15%

Straight forward as it gets. This is how long you have used credit in the past. It is based on the average length. For example, if you have two credit cards where one you’ve had for 10 years and one you just opened, your average length of credit would be 5 years. If you spin this further, each new credit will have less of an effect on the credit age as it is spread across more cards.

Alex’s example: My overall length of credit is on the low end at 2.5 years due to new credit cards I have opened in the last few years. However, as it has a lower imact (15%) on the overall score I am less concerned. I make sure to keep my Chase Freedom card open that I have had the longest to help with this. This is a card that has no annual fee.

Pro Tip: Increase your credit length by becoming an authorized user on a family member’s credit card. For example, you could make a small child an authorized user, who will have a long history by the time they might get their own card.

New credit: 10%

This category looks at how many new accounts have been opened in the past 24 months. When you apply for some credit cards, mortgage or car loan, companies will make an inquiry on your account. The inquiries are either hard or soft inquiries with hard inquiries required when the lender needs to view your credit report as part of their decision making process (e.g., mortgage approval). Hard inquiries impact your credit score and soft inquiries do not. The impact from any hard inquiries will fade over the 24 months. This category is also where the most confusion is. People ask, isn’t opening so many new cards bad for your credit? Most credit cards do make hard inquiries to approve you and if they do, this will only have a 10% impact.

Alex’s example: Based on the picture below I had three inquiries that have been reported in the last 24 months. Nothing too crazy, as often inquires like the latest on my Business Credit Card didn’t actually show up here. Overall I have opened over 10 credit cards in the last three years.

Credit Mix: 10%

It might surprise you to know that it actually helps your score to have several credit cards and different forms of debt. Credit types like a car loan and a mortgage help you in this category. You can also see in the picture below that having more than 10 accounts open will give you the highest marks. So just having one credit card open actually will result in a lower score here. Bottom line is that high marks in this category and low marks in the New Credit category will probably cancel each other out.

Pro Tip: You are entitled to a free credit report from each of the three credit reporting agencies (Equifax, Experian, and TransUnion) once every 12 months. You can request all three reports at once, or space them out throughout the year.

Using a simulator to see how your score is being affected

Chase has a nice feature where you can simulate how changing factors may impact your score. Below is an example were I plugged in a scenario where I will be applying for four more credit cards. With everything staying equal they expect my score to drop down to 754, a mere drop of around 20 points for all those inquiries. Therefore confirming again that applying for new credit cards might hurt your score temporarily. Over the long-term your score will actually increase.

Summary:

With everything said above, I hope I was able to clarify and debunk some myths around your credit score. My score should be a good example for someone with no or little credit history. Within a fairly short time frame, you can build it into a score that will allow you to qualify for any kind of credit needed and best rates when applying for a loan or mortgage.

Again, the most important aspect is to be responsible and not spend more than you can afford. Try not to carry any balances forward. Pay off your statement balance each month.

Anything surprising for you here and things that can help your score?