It’s easy to take credit reports and credit scores for granted. But could you imagine living in a time where even the idea of a credit reporting agency didn’t exist? How could you go about finding out if someone had a good enough track record for you to know that they wouldn’t vanish overnight after you shell out your cash to them?

Tip: Use WalletFlo for all your credit card needs. It’s free and will help you optimize your rewards and savings!

Humans have been borrowing from each other for thousands of years. Back in 3500 BC ancient Sumerians may have first issued loans for agricultural purposes in Mesopotamia and in Babylon around 1800 BC the Code of Hammurabi codified ceilings for interest on loans for grain and silver. (Interest has been a point of contention in many civilizations and outlawed as usury during periods such as the Dark Ages due to the belief that it was something God frowned upon.)

But determining the creditworthiness of others, at least in some sort of systematic fashion, is still a relatively recent creation. In early Colonial times, bankers and merchants didn’t have FICO reports to instantly pull so they had to resort to other more simplistic means. Neighbors and other counterparts would vouch for the character of the credit applicant and after checking up through the grapevine, bankers would then decide to issue credit. If Abitha, the local basket maker, didn’t think too fondly of you or your family, your hopes for opening up the next big tavern in town may have been over before they started.

This highly subjective method of determining creditworthiness was too inconsistent, and perhaps even more problematic, it lacked the sophistication to keep up with the increasing number of transactions that came along with the rise of industrialization. Lenders were being asked to extend credit to more and more customers who they lacked knowledge about.

In places like the UK this growth helped create the first efforts for credit checks. In the early 19th Century, English tailors started sharing client information with each other in an effort to find those clients who did not pay their debts. They even started the Marvel-esque sounding “Society of Guardians for the Protection of Tradesmen against Swindlers, Sharpers and other Fraudulent Persons” in 1826 in Manchester, England. But the British ran into the same issues as those in the U.S. — gossip and hearsay could go only get you so far. Eventually they needed much more. So in 1857, the Manchester Guardian Society appointed its first “data accuracy officer.”

Back in the U.S., folks began experimenting with different ways to accurately report credit and several credit reporting experiments were born. One of the most well-known of these experiments was the “Mercantile Agency” founded in 1841 by Lewis Tappan. Tappan was an abolitionist and Calvinist who actually had strictly opposed credit and lending money based on his religious beliefs but after experiencing harsh economic times and the “Panic of 1837,” Tappan realized that extending credit might be the only way to create viable business.

The Panic of 1837 had also taught Tappan how important it was to properly extend credit and accurately assess the creditworthiness of individuals. Luckily for Tappan he had built an extensive network across the country while being a well-known advocate of the abolitionist movement. This helped him to retrieve and store information about customers located throughout the nation. Tappan built up such a large database that other merchants reached out to Tappan for his data and his business began booming.

This method of collecting and storing data wasn’t met with open arms by everyone, however. Citizens accused Tappan of invading their personal privacy with his extensive file libraries but despite the criticisms the Mercantile Agency prevailed and by 1844 it had over 280 clients.

In 1849, Tappan retired and Benjamin Douglass took over the business. Ten years later, Douglass transferred the company over to Robert Graham Dun, who changed the “Mercantile Agency” name to “R.G. Dun & Company” and continued to expand business over the next few decades.

At the same time of this name a change, another powerhouse and rival was formed. In 1849, the John M. Bradstreet Company was founded in Cincinnati, Ohio, by a relative to American poet Anne Bradstreet. Bradstreet grew to popularity by publicizing the first book of commercial credit ratings known as the Dun Book. In 1857, Bradstreet published a highly detailed version of this book and the competition between the two firms picked up and in 1864, the former Mercantile Agency, R. G. Dun and Company, created an alphanumeric system that would be utilized for credit ratings for decades to come.

Thus, by the end of the Civil War the foundation was largely in place for credit reporting with commercial borrowers and by 1900 there were around 50 credit agencies operating in the US. But credit reporting focused on consumers was still not something that existed. But that would soon change, as the first credit bureau emerged near the end of the 19th Century.

In 1898, in Chattanooga, Tennessee, Cator Woolford created a list of customers that frequented his grocery store that he believed were worthy of credit and then he started circulating this list to other traders. The business soon took off into other industries such as insurance and even into international markets. By 1913 his company was re-branded as “Retail Credit Company, Inc” based in Atlanta, Georgia.

Around this same time, things were beginning to change as the Worker’s Rights Movement began and workers gained more rights along with increased wages. Merchants, including the automobile industry, wanted to cash in on the new state of the economy and so they began offering credit lines. in 1919, GM via GMAC started offering automobile loans and by the 1920s more than 20 percent of purchases made in US department stores were on credit, as things like appliances, furniture, and radios were becoming increasingly common to purchase with installment plans.

Credit reporting agencies like the Retail Credit Company were growing and more and more Americans were becoming more open to borrowing money based on credit to make purchases. But once again, security and privacy issues would rile consumers.

The Retail Credit Company didn’t just mine data on credit profiles, capital, and character, but it even delved into other aspects of borrower’s lives regarding things like political affiliation, marital troubles, childhood, drinking habits, and even sexual activity. It was even rumored that the RCC would reward its employees for finding dirt on consumers. (Could you imagine this going on today?) This led to a lot of resistance toward the RCC, especially when RCC announced they would be storing this information in these new contraptions known as computers, allowing for much more rapid transmission of such personal and at times damning information.

Alan Westin wrote in a 1968 New York Times article that, “transferring information from a manual file onto a computer triggers a threat to civil liberties, to privacy, to a man’s very humanity because access is so simple.” The outcry would eventually lead to the passing of the Fair Credit Reporting Act (FCRA) in 1970—a landmark piece of legislation that came with a host of rights. Notably, it forced credit bureaus to make their files public; remove data on race, sexuality and disabilities; and also remove negative information after a certain time period.

The circus surrounding the hearings and the passage of the FCRA is thought to have been so damaging to RCC that in the 1970s it changed its name from the Retail Credit Company to a company called Equifax, as it is now known today.

Back in the 1950s another credit reporting agency was coming into existence. Two of the most famous aerospace engineers, Simon Ramo and Dean Wooldridge had been leaders on the Intercontinental Ballistic Missile program established in response to threats from the Soviet Union. These two visionaries believed cashless payments were the way of the future and knew they could apply their scientific and technological knowledge to commercial markets to determine individual creditworthiness in order to effect such payment methods. Despite the voices of many skeptics, they worked out a deal with Thompson Products in order to obtain the needed capital and formed a joint business known as “TRW.”

TRW used some of the most talented software engineers in the US to catch up to their competitors like the Retail Credit Company and in 1968 they entered the credit reporting industry with the acquisition of San Francisco-based “Credit Data.”

(1968 was also the yearTransUnion formed as a holding company for a railroad leasing organization. A year later TransUnion acquired the Credit Bureau of Cook County, which maintained over 3.6 million card files giving TransUnion the jump start it needed to compete in the market.)

TRW’s technology-driven approach accelerated their growth while allowing TRW to remain accurate and effecient with their handling of credit reports. Some even have referred to TRW as the “Google of their time” because of their powerful informational databases used for things like targeted marketing. By 1986, TRW had become the first credit agency working in all 50 states, although RCC AKA Equifax was hot on its trail.

TRW, later known as TRW Information Systems & Services (TRW IS&S) experienced some mighty struggles in the early 90s during the recession period but they pulled out of the recession with innovative projects like “File One” which helped better consolidate credit records. In 1995, after battling for years through economic struggles,TRW IS&S decided to put the company up for sale and two private equity firms purchased them. They came up with a long list of potential names like Actua, Cogneo, Factbase, Fidelta, Informedia, Knosis, Newlight and Trustin but ultimately settled on one: Experian.

So all three credit bureaus were now born in the US: Equifax, Experian, and TransUnion. But as the big three emerged, there were still glaring differences between the credit reports and a pressing need for better accuracy and consistency given the growing markets for credit. And this is when FICO came in.

[Part II will continue with the History of FICO Scores]

Cash back credit cards are by far the most popular type of credit cards for consumers (close to 70% of people with credit card rewards preferred cash back). Yet, many people assume they want a travel rewards earning card simply because they like to travel and think that travel rewards benefit them the most when in reality they’d be better off with a cash back card.

Update: Some offers are no longer available — click here for the latest deals!

Rewards

One of the biggest considerations you should think about before choosing between cash back versus travel rewards is if you are savvy enough with travel credit card rewards to actually use them in an effecient way.

Many people find travel rewards just too daunting and understandably so. There are tons of airlines, complex award charts, black-out dates, and other headache-inducing rules and policies to get acquainted with. All of these can make travel rewards overwhelming at times and some folks just don’t have the time or patience for it.

If you feel this way then travel rewards credit cards that earn transferrable points or miles for certain airlines might not be the best option for you. Instead, you might be better suited for cards that earn true cash back or cash back equivalents in the form of travel currency or even gift cards.

True cash back cards would be cards like the Citi® Double Cash Card that earn 2% back on all purchases (1% at the time of purchase and another 1% once you pay off your statement). These cards are very straightforward. You always know you’re earning 2% back and you can apply those savings to any purchase for a 2% rebate. For those attracted to simplicity this might be the best route.

Other cards operate similar to cash back credit cards but limit your redemption options to travel. For example the Barclaycard Arrival Plus World Elite MasterCard® earns 2% back but only when those points are redeemed on travel purchases (in reality it earns slightly more than that due to a 5% rebate). For these cards, you can only redeem statement credits on qualifying travel purchases. This means these cards come with a bit more restrictions than other true cash back cards so they’re not quite as simple to use but they are still easier than dealing with transferrable points.

I should also note that you can generally redeem points earned from travel rewards cards for cash back or through travel portals that allow you to circumvent having to transfer points and use award charts. Some of these travel portals, such as the Chase Travel Portal, will allow you to redeem points for travel bookings like airfare and hotels at pretty decent rates that can offer great value.

However, when it comes to using travel rewards points for cash back earnings, you typically give up a lot of value that could be maximized by transferring those points to travel partners. Thus you usually don’t want to get a travel rewards card just to earn cash back.

Tip: Use WalletFlo for all your credit card needs. It’s free and will help you optimize your rewards and savings!

Sign-up bonus

Cash back credit cards are not generally known for having very valuable sign-up bonuses. Where a travel card might easily offer $500+ worth of travel for a sign-up bonus, cash back credit cards will often offer much less valuable sign-up bonuses in the realm closer to $200 (although this is not always the case). In fact, some cash back cards like the Citi DoubleCash don’t offer any sign-up bonus at all.

As explained below, don’t allow the lack of a sign-up bonus to deter you from pursuing a cash back credit card. Some cash back cards don’t have sign-up bonuses but they have great earning structures and no annual fees that make them a lucrative option for long-term use.

Annual fee

Annual fees are important to pay attention to when choosing credit cards but especially cash back cards. This is because there is very little (if any) subjectivity that goes into calculating the value received by cash back credit cards. If your card earns 2% back then you know you’re getting back $20 when you spend $1,000 versus if you earned points on a travel credit card your value received would depend on the valuation of the points and potentially other perks offered by the card.

So when you come across a 2% cash back card offering a $95 annual fee you know you need to spend at least $4,750 annually just to break even on the annual fee since $95 is 2$ of $4,750. If you knew you were only going to spend $4,000 in a year then it would not make economic sense to pay $95 for the annual fee since you’d be at a net loss.

This is why no annual fee cash back cards are so great for use in the long run. There is no annual fee that will cut into your cash back earnings so you know you’re always coming out on top. This is also why the need to downgrade or product change your card might be needed when seeking certain cards since you’ll always want to mitigate the annual fee as much as possible.

Bonus categories

Just like many travel credit cards, many cash back cards offer bonus categories for spending. Some like the Discover it and Chase Freedom offer quarterly bonuses up to 5% back on select product categories while others like the Blue Cash Preferred® Card from American Express might give you bonuses for certain categories like: gas, supermarkets, or other categories. These bonus categories can greatly enhance your cash back earnings so you should always try to maximize your earnings with bonus category spend.

Cash back cards can also be a good way to supplement your spend on travel rewards cards. For example, it might be in your best interest to use a cash back card for purchases that won’t code as a bonus category on your travel rewards card in order to maximize your earnings. This won’t always be the case but sometimes it is.

Foreign transaction fees

It’s becoming very difficult to find travel credit cards with foreign transaction fees. However, it’s much more common for cash back cards to have foreign transaction fees so you always need to be on the lookout for these if you like traveling. Issuers like Discover and Capital One are known to offer no foreign transaction fees even with no annual fee credit cards so their cards can be good options.

Final word

Cash back cards can be great because they offer simplified ways to earn rebates on your spending. You’re not able to exploit reward points for maximum value but you can still earn a decent return around 2% and won’t have to hassle with confusing and complex reward systems.

There’s a lot that goes into getting and keeping a great credit score. This is especially true when you’re into “travel hacking” and applying for new credit cards every month. Yet, I think there are just a few principles that you can stick to that will help ensure that your credit score stays in good shape. So here are a few keys for getting and keeping a great credit score. 

Don’t “eff up!”

The biggest tip for having a good credit score is not “eff up.” And by eff up, I mean missing a payment and becoming delinquent and/or allowing something to go into collections. Your payment history is the most heavily weighed factor for your credit score and amounts to 35% of your score.

Making a late payment and/or allowing something to fall into collections can have huge consequences for your credit score, like dropping your score more than 100 points or preventing you from getting the perfect credit score. 

If you’ve just caught yourself in default then make your payment as promptly as possible since you still might be able to lessen the damage.

For example, a 30 day late payment will affect your credit less than a 90 day late payment or a charge off. After you’re hit with the late payment, try to do some research on getting that late payment removed. You’d be surprised how much great information you can find on internet forums where others have likely attempted the same thing you’re trying. Read up on what has worked and what hasn’t and then give it a try. 

Sometimes a goodwill letter will work to get a late removed but other times you might need professional assistance, which can be a bit costly. It can often be hit or miss with getting late payments removed, but in many cases, it’s worth the hassle.

So do whatever you can to not miss a payment but if you do, start researching on how to get that late payment removed. Read on about how late payments can affect your credit score here.

Tip: Use WalletFlo for all your credit card needs. It’s free and will help you optimize your rewards and savings!

Get creative to lower your utilization

Credit utilitization is how much you’re currently using of your overall revolving credit limit. It’s a major factor for your credit score, making up 30% of your FICO score. Generally, you want your utilization to be below 30% but I recommend keeping it closer to 10%.

The easiest way to get your utilization down is to pay off or pay down your credit card balances. Unfortunately, that’s not also the quickest or most practical option for many. So sometimes, especially when people are just starting out, I recommend for them to look into getting a debt consolidation loan.

As long as this loan is an installment loan, you’ll be able to potentially get your utilization all the way down to 0% virtually overnight. That’s because installment loans are not factored into your credit utilization (something a lot of people are not aware of). For people who are only being held back by high utilization, this is a great option to catapult your credit score .

Another option to consider is getting added as an authorized user to bring down your utilization. By getting added to an account with low utilization, you can piggyback off this account and increase your credit score. This is a great option for people who are a bit stuck with a lower credit score and don’t have an option of getting a loan or other form of credit to free up their utilization. 

To find out more about how utilization affects your score, read about it in this article. 

Never close your oldest account

The age of your oldest account is the number one factor when determining your credit history, which is the third most important category when determining your credit score. The age of your oldest account will also affect the “average age of your accounts” which is another important factor for credit history. Thus, you want to keep your oldest accounts open in order to help boost your credit history.

You also want to try to cancel as few cards as possible. Look into other options like downgrading or product changing your card to avoid annual fees and allow your accounts to age. Also, seek out retention offers that can often cancel out your annual fee. In the long-run, keeping your accounts open will help your accounts to age and allow your credit score to steadily continue to rise over time. 

Try to combine inquiries when possible

An average credit score will suffer a 2 to 5 point drop with each “hard inquiry” that hits your credit, meaning that each credit card application could cause a small dip in your credit score. While these dips are small and also temporary, it’s still a good idea to mitigate the damage done by hard inquiries whenever possible.

Thus, it’s a good idea to get familiar with banks that will allow you to combine hard pulls. This means that you can apply for multiple credit cards at the same time (or within a certain timeframe) and you will only be hit with one hard inquiry instead of numerous hard inquiries. Usually when you apply for cards from banks like Chase and American Express, the credit bureaus will combine multiple hard pulls into one. Utilizing combined inquiries will help mitigate damage done to your score over time. 

To find out more about how hard inquiries affect your credit score read here.

Consider applying for small business credit cards

This is really for those people who are signing up for a lot of credit cards. At a certain point, you should look into applying for business cards. There are many benefits for applying for business cards and they can help you mitigate the damage done to your credit report by preserving your average age of accounts and not forcing you to incur an additional annual fee (since you can cancel the card without hurting your score). To find out more about how small business credit cards can work to your advantage read here.

Mix it up

This is the least important tip but you can help boost your score by a few points if you have a mix of both revolving and installment lines of credit. I wouldn’t go out pursuing credit just to diversify your credit mix but it’s often the case that this will happen organically as you pursue a car, home, etc., so it’s something just to be aware of. Learn more about how credit mix affects your credit score here.

Final word

It’s a common misconception that you’ll hurt your credit score by applying for credit cards, or a lot of credit cards. However, if you follow these principles over time your credit score will increase and your entire credit report will strengthen. 

Having a thorough understanding of your credit score is vital not just for “travel hacking,” but for bettering yourself financially in the long-run. Since we don’t teach this stuff in schools, a lot of it might seem foreign to you at first, but once you get down the basics, the nuances will start to make more sense and you’ll realize how simple it is to understanding how your credit score works. If you don’t know much about credit scores or you know a little but feel like you need to brush up your knowledge, then be sure to read this beginner’s guide to credit scores. 

What is a credit score

According to Bankrate, “[y]our credit score is a three-digit number generated by a mathematical algorithm using information in your credit report.” This number is engineered to indicate your creditworthiness, which is another way of  asking, “how big or small of a risk are you to lenders?” Banks and lenders want to have a way to gauge how likely you are to are pay your bills on time and that’s what a credit score does.

So why a number?

Using computers and algorithms to generate a number is quick, cost-efficient, and easy for lenders to use. It reduces the time and cost that it would require to have humans manually determine your creditworthiness and serves as a reference point much like a GPA does for college admissions. 

And let’s not forget, with so much data incorporated in these credit rating systems, credit scores are presumably more accurate when it comes to the masses, so using mathematical formulas should ensure greater accuracy that otherwise might not occur due to human error or lack of judgment.

Tip: Use WalletFlo for all your credit card needs. It’s free and will help you optimize your rewards and savings!

How is a credit score determined?

Your credit score is determined by the following categories:

• Payment History (35%)
• Utilization (30%)
• Credit History (15%)
• New Credit (10%)
• Mixed Credit (10%)

Within each category are different factors that are considered. For example, when it comes to “Credit History,” which makes up 15% of your score different factors like the age of your oldest account and the average age of accounts are factored in. Each factor carries its own weight and sometimes it’s known which factor counts the most. However, we don’t know exactly how these factors are calculated and exactly how they affect your credit score. That’s determined by the propriety algorithms of the likes of FICO, Vantage, etc., that we don’t have access to. 

Still, we have more than enough information to be able to at least guide our way through understanding the basics of credit scoring so that we can actively take steps to improve our credit scores and reports. Below is a breakdown of each category that determines your credit score and what you should know about them. 

1. Payment history (35%)

This is the most important category and it makes sense that it is. After all, the point of a credit score is to determine how likely you are to pay your bills, and so it’s not surprising that your track record of paying bills is what will be scrutinized the most.

Late payments will stay on your credit report for 7 years, although some bankruptcies will remain on your report for up to ten years! Luckily, the negative effect of late payments and other negatives begins to lessen as more times passes, so although it might stay on your report for 7 years, the effect will usually only be felt for a limited amount of time (i.e., a few years). 

How much a late payment affects your credit score depends on a mix of factors, including:

• How late they were and the number of past due items listed on a credit report
• The amount of money still owed on delinquent accounts or collection items
• How much time has passed since any delinquencies, adverse public records or collection items

The number one piece of advice I give to everyone is to not mess up! Do whatever you can to keep your payment history at 100% on-time payments with no blemishes. Obviously, this doesn’t happen for everyone so if you do screw up then try to look into options to get late payments removed. Often you may just have to wait for the negative effect to lessen over time but sometimes you can a bit lucky. You can read more about payment history here.

2. Utilization (30%)

Utilization is your credit to debt ratio. You find this by dividing the amount of debt you have by your total credit limit. So for example, if you have a $10,000 total credit limit and owe $5,000 in debt, then your utilization is at 50%. 

There are two different types of utilization you should be concerned with. There is your overall utilization and then there is your individual utilization for different credit lines.

You want to keep your overall utilization below 30% but I recommend to keep it down to 10% or below. That’s just my personal suggestion and based on my experience, having my utilization at 10% versus 30% seemed to provide me with a bit of a boost to my credit score.

Next is your utilization for your individual cards. You never want to have a maxed out credit card and I would try to keep your utilization for each line of credit at the same 10 to 30% mark, although your score will be less affected if an individual card rises above 30% versus if your overall utilization were to go over 30%. Another reason to keep your utilization low for each credit card is that when you apply for an additional credit card from the same bank, they might hold it against you if your utilization is very high on one of their cards.  

You definitely want to keep your utilization in mind when deciding when to pay off your credit cards and if you’re thinking about cancelling a card, since it is the second most important factor in your score and can be immediately affected very easily. 

3. Credit history (15%)

The credit history category consists of the of the following factors:

• Longest opened account
• Average age of account 
• Time since newest account
• Time since each account was last used 

The most important of these factors is the age of the longest opened account while average age of accounts is second. The time since newest account and time since each account was last used carry much less weight than the other factors, so I don’t think you need to focus on them too much. 

To help boost this category, I suggest always trying to keep your accounts open as long as possible and never close your oldest account. In addition, you can look into getting business credit cards to help mitigate damage done to your average age of accounts. 

4. New Credit (10%)

This category is most known for its effect felt from hard inquiries. Hard inquiries result when your credit is pulled for review by lenders and certain other institutions and they differ from soft inquiries in the latter don’t affect your credit score. Click here to read more about how hard inquiries affect your credit score. 

Other factors besides hard inquiries in the new credit category are:

• How many new accounts you have
• How long it’s been since you opened your last account

This category often takes a lot of hits when you begin to “hit it hard” with your credit card applications. But the good news is that the damage is often very temporary and gradually decreases, as your credit becomes more established. If you implement a good strategy where you’re steadily picking up one or two cards a month then the effect from hard inquiries over time should be minimal. And if you responsibly manage your credit cards (making on-time payments in full), your credit score will actually rise over time. 

5. Mixed credit (10%)

And finally, there’s “mixed credit.” This category evaluates your overall “mix” of credit lines. So for example, it wants to see if you have a diverse range of credit consisting of different types of credit lines like student loans, auto loans, home loans, credit cards, etc. It’s generally recommended to not worry about this category since it’s only 10% and is usually just a category that helps people hit a “perfect” credit score well into the 800s. Still, it’s good to be aware of this category.  

So that’s how your credit score is figured out but what about your credit report? How does that fit into the equation?

Credit reports

At the end of the day, we’re not at the point where we can rely on computers to solve everything. We still need humans to consider a multitude of factors that aren’t always reflected in a three-digit number. Thus, credit reports exist to provide lenders with a more detailed picture of your creditworthiness, beyond what a credit score can tell them.

Your credit report is the detailed report containing the history of your accounts and payment history from the very beginning (barring any expiring data). As mentioned above, if your credit score is your GPA, then your credit report is your transcript. While your credit score will often reflect what can be found on your credit report, sometimes it’s what’s on your credit report that’s more important for credit approval decisions.

For example, many people with very thin credit profiles (little to no credit history) can have scores in the 700s which is generally considered a good to great score. However, if your credit report shows no established history of managing credit accounts then that number may not do you much good at all since many lenders will want to see an established history before they approve you.

The information on your credit report mirrors the categories that make up your credit score. Some reports use different terminology and may lump categories together or divide them up further, but if you round up all the information on your credit report, you can find one of the five credit score categories to put them in. 

Some of the most important information to lenders on your credit report are the following categories: 

Payment history

Credit reports provide lenders with the “full story” about your track record for paying bills.

Negative marks like bankruptcies, foreclosures, and late payments over 90 days/charge-offs are huge red flags to lenders, especially when they are recent. Some banks will give you a break if it’s been several years since your last hiccup and by examining your report, they can tell if you’ve been able to stay on track and prove to them that you’re less of a risk.

Also, a credit report can tell them how long you’ve been paying your bills on time and what kind of bills you’ve paid. Many lenders may want to see that you’ve handled a certain type of credit for an established period of time (credit cards, student loans, car loans, etc.) and your report will tell them that. 

Utilizing credit 

A lot of lenders want to see how much of your credit limit you are currently utilizing. In some cases, they’ll want to see if you are using other credit cards to see if you’re a potentially profitable customer. If you haven’t, this could be used against you in some cases, but the biggest red flag is if you have maxed out your credit lines. 

New accounts and inquiries 

Banks are becoming increasingly concerned with the specific number of accounts opened and the number of recent inquiries on your report before they approve your for certain credit cards. If you’ve opened up a lot of credit cards in the previous year or two, lenders will see that and might hold it against you.  

Thus, while having a good credit score is important, having a solid credit report is even more important since the details on that report are what will usually allow you to get approved or not when applying for credit. That’s why it’s very important to understand what goes in that report and how you can work to affect it.

Different types of credit scores and reports

So now you know what a credit score is, how it’s calculated, and how it fits in with your credit report. But did you know there are several different types of credit scores and reports? There are FICO scores, Vantage scores, FAKO scores, and a few others. However, by far the most commonly used scoring system is the FICO score model. 

There are a few ways to get your FICO credit score

• Freecreditreport.com offers you a $1 seven day trial where you can view your FICO Experian score and get your credit report for free once a year. 

Banks and credit card companies offer free FICO scores, so if you have an account with any of the following be sure to see if you’re eligible for a free FICO score:

• American Express (Experian)
• Barcalys (Trans Union)
• Citi (Experian)
• Discover (Trans Union).

You can also get what’s dubbed a “FAKO” score, which is often close to being accurate to your FICO scores (though sometimes they can be off by quite a large margin).

There are several ways to get your FAKO scores:

• Credit Karma (TransUnion and Equifax score)
• Mint.com (Experian)
• Credit Sesame (TransUnion)
• Quizzle (Equifax or TransUnion)

And just so you’re aware, there can be over 60 different types of FICO scores! The good news is that you don’t have to worry about all of the different models. Just finding out what your FICO score is through one or more of the above models should be sufficient. 

I generally recommend for people to avoid cancelling credit cards in order to continue to build up their credit report and improve their credit score. However, there are certain times when it makes sense to cancel a card but only after understanding the options for a downgrade/product change or other strategic or personal reasons. Here’s a rundown of different factors to consider if you’re asking yourself if you should cancel your credit card. 

Credit score

The first thing is to be aware of how a credit card cancellation might affect your credit score. I suggest reading my post on how closing credit card accounts affects your credit score. There are a few key points from that article.

• The first is that you want to try to avoid closing your oldest account(s) since that’s a major factor in determining your credit history, which is also 15% of your credit score. Keeping your oldest account alive will also help you lengthen your “average age of accounts” which is another key factor for determining your credit history. 
• Second, you want to make sure that if you cancel your card, you’re not going to hurt your utilization since that would likely cause the most immediate effect on your credit score (it accounts for 30% of your total credit score). 
• Third, with FICO scores, after you cancel an account, your account will continue to age for 10 years. This means that if you are opening and keeping open several accounts, then a cancellation here and there will have minimal effect on your credit history even when the 10 year period is up and those canceled accounts drop off your report. But if you have a very limited number of accounts, once that account drops off, it could significantly lower your average age of accounts.

Again, for a more in-depth look at how closing credit cards affects your credit score read the article above.

Tip: Use WalletFlo for all your credit card needs. It’s free and will help you optimize your rewards and savings!

Downgrades and product changes 

Before deciding to cancel a card, it’s crucial to be aware of the possibilities for downgrades and product changes.

Downgrades are when you simply downgrade a version of a card to an inferior version that usually offers fewer benefits but a lower (or no) annual fee. A product change is when you convert one type of card into a completely different type of card (e.g., a Chase Sapphire Preferred into a Chase Freedom). It’s very common for banks to require you to wait 12 months before you can downgrade or product change a credit card so always keep track of your account opening dates! 

Most banks offer ways for you to downgrade or product change a card with an annual fee to a card with a no annual fee. Citi is actually really good about this and allows you to even change from co-branded cards to Citi branded cards.

Other banks like Chase may limit you to product changing co-branded cards within a specific brand. For example, if you have the United MileagePlus Explorer card you’ll probably have to downgrade that to another version of the United MileagePlus card and wouldn’t be able to product change it to a Chase Freedom. 

And finally, banks like American Express won’t allow you to convert a charge card into a credit card. So you wouldn’t be able to change a card like the Premier Rewards Gold Card to a card like the Amex EveryDay. 

Make sure you research thoroughly on the possibilities for downgrades and product changes because I’ve been told by bank representatives on multiple occasions that they couldn’t process a requested change and all it took was me calling back and speaking to someone else to get the job done.

Also, sometimes there are “loop holes” you can use when product changing. For example, you typically need to wait 12 months to product change a Sapphire Preferred into a Chase Freedom. However, if you downgrade a Sapphire Preferred to Sapphire (normal version),  you can then product change to a Freedom without waiting12 months. 

Points still transferable? 

Many programs limit your ability to transfer points to travel partners based on what type of premium card you hold. For example, if you wanted to transfer points to Ultimate Reward travel partners you need the Sapphire Preferred/Reserve or the Ink Plus, of if you want to transfer to Citi travel partners you need the Citi Prestige or Premier.

In addition, you need to be aware of expiration rules caused by cancelling cards. A notorious example of this is that Citi will cause your points (earned from a specific card) to expire 60 days after you cancel a card!  

So make sure you that if you are planning on canceling your card you’ll still be able to transfer your points out to travel partners. 

Hurting or helping your wallet?  

The next thing you want to think about is how cancelling or not cancelling a credit card will affect your wallet. In other words, will it be worth it to pay the annual fee? 

You need to think about if you’re getting enough value out of your credit card to make it worth paying the annual fee. And if you are getting enough value from your card, you want to then make sure that you’re getting the maximum amount of value. I’ll use the now somewhat extinct Chase Ink Plus and Cash cards to illustrate what I’m talking about. 

The Chase Ink Plus has/had a $95 annual fee. If you valued Ultimate Rewards at 2 cents per point and earned 5X on office supple stores, then by spending $950 on 5X categories you’d be earning 4,750 Ultimate Rewards. At 2 cents per point, that would come out to a value of $95, meaning that you would have earned enough points to offset the annual fee. However, depending on your spending, you still might be better off with the Chase Ink Cash since it also offers 5X but comes with no annual fee. The same question could be asked of other cards like the Amex EveryDay and EveryDay Preferred, etc. 

The point is to always ask yourself: 1) am I offsetting the annual fee with earnings from this card? and 2) is this the most valuable option available to me for offsetting the annual fee? If the answer to both of those questions is yes, then trying to avoid paying the annual fee likely is not a valid reason for canceling a card. 

Approval odds

Sometimes you may need to cancel a card or not cancel a card to improve your odds of approval. Here are some examples of when that may be the case. 

For Citi credit cards, you’re limited to one bonus per brand per 24 months (among other rules). In the past, opening, closing, or product changing a card has reset this 24 month “timer.” Thus, let’s say you have had the Citi Premier for 12 months and wanted to hit the bonus on the Citi Prestige soon. In that case, you may not want to cancel or change the Premier since it would force you to wait an additional 12 months to get the Prestige bonus. 

Other times you may need to cancel in order to avoid being declined for too many cards issued by a bank. For example, American Express has a limit on 4 or 5 total credit cards (as opposed to charge cards with no set limit). So if you have 5 American Express credit cards, you’ll need to cancel a card (or two) to get approved for an additional credit card.

Even for banks like Chase that don’t seem to impose a hard limit on the number of cards, it sometimes might be worth just cancelling a card or two so that your total credit cards with them don’t exceed 6 or 7. Otherwise, it might get tougher to deal with recon calls when they see you’ve curated a panoply of Chase cards.  

And finally, if you’re looking to “churn” and earn a sign-up bonus for the same card twice many banks will not allow you to earn an additional sign-up bonus for a card if you currently hold that same card in which case it makes sense to cancel. 

Fatigue

I’ve seen this come up a few times where people just get tired of managing so many dang credit cards. This mostly applies to people with 20+ credit cards. It’s not always fun keeping up with different cards to monitor fraud, making sure that they stay active and that you’re not forgetting about an annual fee or some other obligation attached to the card. For that reason many people just get tired and decide to part ways with their cards. Obviously, that’s an entirely personal decision and while I don’t find it to be a burden to keep up with cards, I certainly could see how some people could get tired of it. 

Final word 

Overall, I say try to keep your cards open as long as possible. If you’re thinking about cancelling, always make sure you understand any potential effect it might have on your credit score, and other things like your point earning potential and strategy for applying for cards. I don’t think it’s necessarily a bad thing to cancel cards here and there, but I’d always to try to explore other options before giving the axe to a card. 

A lot of people don’t realize that one person can have tons of different credit scores at once. In fact, just for FICO alone, you could have over 60 different credit scores when you consider all the different editions and versions available! The good news is that you don’t really need to get caught up in all of the differences in these editions and versions. However, just in case you’re curious and want to know more about which credit scores matter, take a look at this article. 

FAKO versus FICO

The first thing to be aware of is the difference between FAKO and FICO scores.

FAKO credit scores are basically non-FICO scores that you can get from websites like Credit Karma, Credit Sesame, Mint, Quizzle, etc. They are great because they are usually free and can give you an idea of where your credit score stands but they are not the scores that most lenders use so they have limited applicability. (Also, FAKO scores are not always the same as your FICO score, and I noticed that as I got more credit cards my FAKO scores generally remained lower than my FICO scores.)

FICO scores on the other hand are what the vast majority of the top lenders use to predict your credit worthiness. Thus, it’s your FICO credit score that you should mostly be concerned about. The thing about FICO, though, is that it can be confusing to know what your score is because there can be many different types of FICO scores. 

Tip: Use WalletFlo for all your credit card needs. It’s free and will help you optimize your rewards and savings!

Different editions (or generations)

Just like new software systems are rolled out every few years, FICO every few years comes out with different editions of it scoring model. For example, here are some of the previously released editions:

• FICO 98 (1998)
• FICO NextGen (2001)
• FICO 04 (2004)
• FICO Score 8 (2008) [most widely used today]
• FICO Score 9 (2014)

Each edition is implemented in order to more accurately predict the credit worthiness of consumers based on new developments in modeling, testing, and research. For example, when FICO Score 8 came out it lessened the blow that isolated late payments would have on a credit score, devalued the benefit of authorized users, ignored collection accounts of less than $100, and made high balances on credit cards more punishable. Also, the new FICO 9 model helps eliminates the negative effect of a paid collection account also lessens the negative effect of medical collections.

It can take a while for lenders to adopt new editions, however. The reason likely has to do with cost and the old adage, “if it ain’t broke, don’t fix it.” Remember, these lenders are in the business of making money and if they’ve been perfectly successful working with a previous FICO edition, there’s not much of an incentive for them to jump off that train and on to the next which may not be as proven yet. That’s why even today many mortgage lenders still use editions from 2004 or prior and most credit card issuers use the FICO Score 8. It just works. 

Side note: some of the older scores are only available to lenders so you probably can’t get your hands on them. However, you should be able to find ways to access the more recent editions of your scores.

Different versions

So now you know that there are different editions of FICO scores, but did you also know there are different versions? In fact, there are so many different versions that you could have over 60 different type of FICO scores out there at once!

Different bureaus

You might be familiar with the different credit reporting bureaus. They are the following:

• Experian
• Equifax
• TransUnion

Each of these bureaus collects its own information about your credit file which is then used in conjunction with a FICO edition and version to formulate a credit score. This is why you could have a different FICO score for each bureau since they all collect their own information.

A lot of times, the credit scores for each bureau and edition are given names. You may have come across some of these names before. For example, the FICO Equifax score for the FICO 04 model is also called the “Equifax Beacon 5.0.” Scores for different editions for Transunion typically include “Risk Score” in their name and Experian typically includes “Risk model.”

So now you know there are different editions of FICO scores and that there are different versions of these editions based on information provided by the credit bureaus.

But it get’s even deeper.

Industry FICO scores

FICO also develops industry specific FICO scores. In addition to the “general” credit score, there are industry specific scores for the following:

• Auto
• Mortgage
• Credit card (bank card)
• Installment loan
• Personal finance

These industry scores don’t typically follow the 300 to 850 scoring model of the general credit score. But while the scores can vary, they are generally pretty close. Also, it’s never guaranteed that a given industry will use an industry specific score, since some choose to use the general scores.

Different bureaus

Each of these different industry versions also have different editions and also come in different versions based on the credit reporting agencies applying them. So for example, you have your “general” FICO Equifax credit score in multiple editions, your “auto” FICO Equifax in multiple editions, and so on and so on. 

That’s how you get to over 50 (or even over 60 when FICO 9 is fully implemented) different types of credit scores. The chart below (via Bankrate) breaks this down in chart form which may help:

Side note: when you apply for a credit card, typically only reports from one or two bureaus are pulled but when you apply for a more significant loan, such as a home loan, likely three different bureaus will be examined.

Don’t let the complexity confuse you

So as you can see, your FICO credit score is probably far more complex than you ever thought. But there’s no point in worrying about the different models in the vast majority of cases.

Only in rare cases would I go out of my way to try take advantage of a certain type of score. For example, if I knew a lender was using the FICO 9 model and that medical collections or a paid collections was what was hurting my score, maybe then I’d try to go out of my way to transact with that lender. Or maybe if I were applying for a home loan and I knew of a lender who would use a more favorable FICO score edition, I would track them down. However, in the majority of cases, I think it’s enough just to find out your FICO scores from banks and other agencies and just stick to monitoring that.

Since the FICO Score 8 is the most commonly used score right now, I’d probably just try to stick with that score and monitor it. 

Final word

It’s nice to know about the different types of credit scores available but it’s not recommended to obsess over them. I recommend sticking with one or two FICO scores that are available to you for free or for cheap and just monitoring those. And maybe, if you’ve got a big loan to get in the future, doing some research into what FICO models might be used by your prospective lenders.  

There are many common misconceptions and myths about credit cards and credit scores. One common area of misunderstanding is what happens when you close your credit card. A lot of people think that it hurts your credit score to close a credit card but that’s not necessarily the case. So here’s the truth about what happens to your credit score when you close your credit cards and some things you should consider. 

This article will be analyzing the FICO method for calculating credit history. There are other methods, such as the Vantage model that do things differently, so this will not apply to all forms of credit scores. However, because FICO scores are the primary credit scores that matter for most lenders (at least at this time), I’m focusing on them. 

Tip: Use WalletFlo for all your credit card needs. It’s free and will help you optimize your rewards and savings!

How your credit score is determined 

The first thing you need to know is how your FICO credit score is determined. Your credit score is determined by the following factors.

• Payment History (35%)
• Utilization (30%)
• Credit History (15%)
• New Credit (10%)
• Mixed Credit (10%)

Closing your credit cards has the ability to change almost all of those factors and I will explain how below. 

1) Payment history 

The bad thing about cancelling a credit card is that you’re not going to be able to continue to build up your credit payment history with that card. Cancelling a card won’t necessarily negatively impact this category but it will prevent you from further building it up. Since payment history is the #1 factor in determining your credit score, that’s definitely something to consider. 

2) Utilization

Utilization is your credit to debt ratio. You find this by dividing the amount of debt you have by your total credit limit. So for example, if you have a $10,000 total credit limit and owe $5,000 in debt, then your utilization is at 50%. It’s recommended to keep this number under 30% but I also recommend keeping it under 10% for maximum benefit to your score.  

This factor can be affected immediately when you cancel a card because you’re decreasing the credit limit (or denominator) in your equation. So let’s assume you have two credit cards that form your $10,000 credit limit, both with $5,000 limits. As soon as you cancel one, your new utilization will jump from 50% to 100%, which is very bad! 

If you absolutely must cancel a card then I recommend closing a card with the smallest balance or asking if you can transfer credit from that card to another card if you have two or more cards with the bank. (Make sure that this will not incur an additional hard pull on your credit, however.) Banks, such as Chase bank, should allow you to do this with no problem. 

3) Credit history (average age of accounts) 

Average age of accounts (AAOA) is one of the most confusing factors for credit reporting and understandably so. AAOA fits into the “credit history” category. It’s important to remember that for FICO purposes these factors combined only affect 15% of your total credit score. Thus, even if they were to change, the impact would not be as substantial as payment history and utilization, which together account for 65% of your credit score.

The credit history category consists of the of the following factors: 

• Longest opened account
• Average age of account 
• Time since newest account
• Time since each account was last used 

The most important of these factors is the age of the longest opened account while average age of accounts is second. The time since newest account and time since each account was last used carry much less weight than the other factors, so I don’t think you need to focus on them too much. 

4) Mixed credit 

By cancelling a credit card it’s possible that you’re reducing the mix of your credit. For example, you may only have student loans and auto loans on your credit report once your credit card drops off. If that’s the case then you still shouldn’t worry. That’s because this “mixed credit” category matters the least out of all the categories and it really is only important for people trying to bolster their credit scores above 800 — I wouldn’t make this factor determine the outcome of cancelling a card.  

So what do these factors mean? 

First, if you have a thin payment history (maybe only a couple of years) you should try to avoid cancelling your card and try to continue to build up that payment history. 

Second, since your longest opened account matters the most for the credit history category, you should always do whatever you can to keep your oldest account open. Only under extremely rare circumstances would I ever close my oldest account.  

Third, when it comes to average age of accounts, it gets confusing. For whatever reason, FICO includes closed accounts to calculate your average age of accounts and they do this for up to ten years. So yes, that means that even if you close your account, it will still continue to age for ten additional years. After that, your closed accounts drop out of the equation.

Here’s an example of how that works.   

Let’s start with the basics. 

Assume you have two credit cards: a 2 year old credit card and a new one just opened up at the crack of dawn this morning. 

• 2 year old account
• 0 year old account 

Your average age of accounts is now 1 year since (2 + 0)/2 = 1 years. 

Now let’s say you add in another card 5 years from today. Your credit cards now look like the following: 

• 7 year old account
• 5 year old account
• 0 year old account 

Your average age of accounts is now 4 years since (7 + 5 + 0)/3 = 4 years

Now let’s say that on the same day you opened your third credit card, you closed your 5 year old credit card account. According to FICO, this account will still age for the next ten years.

So let’s assume you don’t get anymore cards and we move forward 9.999 years to the day before your ten year anniversary of closing your card. This is what your accounts look like now. 

• 17 year old account
• 15 year old account *closed*
• 10 year old account 

Your average age of accounts is now 14 years since (17 + 15 + 10)/3 = 14 years.

However, the very next day your 15 year old account will drop off changing the make-up of your credit score to the following: 

• 17 year old account
• 10 year old account 

Your average age of accounts is now 13.5 years since (17 + 10)/2 = 13.5 years. 

Thus, unless you’re closing very old accounts and there’s a big age disparity between a limited number of total accounts, the impact of closing a credit card on your average age of accounts may not be very substantial even in the long run. However, it would always be a good idea to keep those accounts from falling off your report after ten years if you think you’ll constantly be applying for new credit cards due to travel hacking.

Tip: Use WalletFlo for all your credit card needs. It’s free and will help you optimize your rewards and savings!

The findings….

First, for purposes of your FICO score, cancelling a credit card has very minimal immediate impact and can even have a minimal long-term effect on your AAOA since it will continue to age for ten years. Although this is true, if you think you’re going to continue to apply for new credit cards each year, you still want to keep your accounts open as long as possible to preserve your AAOA. 

Second, it’s definitely important to always try to keep your oldest account open to preserve your oldest account age, but It’s likely just as important to monitor how cancelling a card will affect your overall utilization. 

Third, it’s actually opening up new accounts that will have more of an immediate effect on your credit history since those will bring down your AAOA instantly. This is why I recommend keeping your accounts open because the fewer accounts that fall off in ten years, the less damage a new account will do to your AAOA.  This is also why I recommend looking into applying for business cards from banks like Chase, Amex, and Citi since those new credit card accounts do not report to your personal credit report and thus do not bring down your average age of accounts. 

Always remember to explore other options 

There are almost always different ways to to downgrade or product change a credit card to a no annual fee version. Thus, if you’re thinking about cancelling a card because you don’t want to bother with the annual fee then make sure there are no other options for changing the card. It might turn out that with a quick phone call to the bank, you can find a solution to allowing your credit card to stay open and still avoid an annual fee. 

Final word 

Here are the final take-a-ways: 

• Try to avoid cancelling credit cards by exploring other options. 
• Remember that while cancelling a credit card may not immediately hurt your credit score, the longer you keep your accounts open, the less damage opening up new accounts will do to your score since your AAOA will be longer. Also, the longer your accounts remain open, the more payment history you can build. 
• If you have to cancel a card, focus on keeping your utilization as low as possible and to try to keep your oldest accounts open as long as possible.
• You can often mitigate the damage done by opening new accounts by going after small business credit cards.