The Five Elements of Your Credit Score

How to improve your credit score

What makes up your credit score and what is the most important elements of the score? There are 5 parts to your credit score and I will address each in regards to questions I get a lot about how your credit score is affected after opening/closing travel hacking credit cards. Your score boils down to five things: your payment history, your utilization, the time length of your credit, the type of credit accounts you have, and finally the number of credit inquiries you get over a period of time. Let’s touch on each and how they relate to the benefits of travel hacking. What benefits do I speak of? I am talking about $4,500 of benefits without doing much. More to come on that strategy later, now time for something much less sexy, but nonetheless important.

1. Your Credit Payment History

First and foremost, making payments (more specifically on time payments) on your credit cards and other credit accounts is the biggest portion of your score, accounting for a whopping 35% of it! It is crucial you make your payments on time and in full every month. Obviously, this is not affected by opening or closing travel hacking cards. If you can’t pay your cards on time and in full every month I would NOT recommend you start travel hacking.

2. Your Credit Utilization

Secondly, your credit utilization makes up 30% of your credit score. This credit utilization includes both individual accounts as well as your credit utilization as a whole. The lower the usage, the better. I try not to have more than 10% of my credit utilized for any one account. That is to say, if you have a credit card with a $10,000 credit limit, try to have less than $1,000 on that line of credit at any given time. This is not affected by opening or closing cards.  As long as you have money in the bank to pay off anything you charge to your card, you are golden.  A benefit by nature of increasing the credit lines you have to utilize, is that you make it harder to be docked for utilizing your credit since you have grown your credit. The key is to keep your spending the same.

3. Your Credit History Time Line

Thirdly, the amount of time you have had credit lines opens accounts for 15% of your credit score.  So the longer your accounts are open the better.  This can hurt your score if you are in the business of opening and closing cards left and right. The truth is you don’t have to close travel hacking cards! I have not closed one to date and I don’t plan to. I have several great reasons for keeping them open. 1. You build credit by keeping them open. 2. You score points through referrals which can really add up and these referral points renew on a yearly basis. 3. They actually can be used towards your wealth building strategy believe it or not. How that is done is beyond the scope of this post, but I will expound on that thought in a future post. It deserves its own post. Suffice to say, all of my travel hacking cards remain open to this day making me credit, rewards, and even money.

4. The Type of Credit You Have

Fourthly, 10% of your credit score is determined by the different types of credit accounts you have open. You get points for having a car loan, a house loan, student loans, and credit cards, and other lines of credit… Seriously? You get points for being in debt? A little odd isn’t it? You are not docked for opening cards here, but you are docked for closing them.

 5. The Number of Credit Inquiries Over A Period of Time

The fifth and final point that makes up your credit score! The remaining 10% of your credit score is determined by credit inquiries.  There are hard pulls and soft pulls. A hard pull can lower your score by roughly 5 points per six month period. Roughly 10% of your credit score is determined by the number of hard pulls you have received within the past 12 months.

In Summary

Obviously, everyone’s credit report has unique elements that make their score what it is. I can tell you that I have opened up 7 cards over the past 6 months and my credit score has not suffered (it has gone down some, but not suffered). It remains great and stands to only get better. For an extra $4500 of free travel in the long-term, I will take a little hit to my credit score in the short-term. It can only stand to go up from here.

See how I travel hack in an upcoming post!