Preparing For Your Points Banking Strategy
The beginning of a good strategy in Points Banking is having sound finances. If you can’t pay off your cards each month, then you’ll need to get that in order before you start Points Banking.
Getting 1-5% of your purchases in miles is not worth getting a 15-29% interest charge! The debt defeats the purpose.
If you don’t have a lot of credit right now, you can still build credit by doing the following strategy. You’ll just have less options and will have to start smaller.
The good news is that you can boost your score fairly quickly, in even as little as 60 days.
Many people know that making credit inquiries can negatively impact your score. This is true. But what most don’t understand is that credit inquiries are not the largest factor in your credit score. Your credit score could easily go up soon after depending on the reason for the inquiry.
While we don’t know the exact algorithm for determining credit score, we do know the general influence certain things have when it comes to determining the credit score. The following gives a summary of these factors.
The big takeaway is to start building credit now. The sooner you start the quicker you can build up your credit score and get the best deals.
Credit scores are determined by five main categories: Payment History, Credit Utilization, Credit History, Types of Credit, and Requests for Credit.
Factors: Credit History and Requests for Credit
Reviewing the graph, we see that your credit history is ~15% of your score. While this isn’t the largest factor, if you don’t have any credit history at all you might be missing out on an easy boost to your score.
We also immediately see that a request for credit (credit inquiry) comes in at only about ~10% of your score, which is hardly anything. In fact, each inquiry only sets you back a couple of points. After 2 years, these penalties are completely removed.
To make sure to maximize your score in this category, you’ll simply need to strategically make inquiries to your credit.
Don’t do it too often or the penalties will rack up, but if you never do it then you can never take the opportunity to increase it.
It’s important to note that if you’re pre-approved for a credit card, you will have less chance of being denied, which helps protect your credit score. Therefore, try to sign up for pre-approved offers as often as you can. Once you actually apply for the offers, they do affect your score, however. The better your score, the more pre-approved offers. Eventually, this becomes a powerful credit-building system.
Looking at the other categories, you’ll see that they all deal with open lines of credit. While inquiring for new credit can slightly ding your score, getting new credit is even more powerful and the result is a net gain in score.
Basically, opening a credit account now is the fastest way to growing your credit score if you have no history.
Factors: Payment History and Credit Utilization
Since payment history and credit utilization are the two highest factors, you’ll want to ensure you are performing well in these two categories.
Payment history means that you make at least the minimum payment on time each month. If you miss payments, it can stay on your history for up to 7+ years. Never miss a payment.
Your credit utilization is a measure of how much of your credit you are using. Its best not to use more than 20% of any individual card, nor 20% of your overall credit limit.
In conclusion, don’t miss payments or use a lot of your total credit at once. In fact, using 20% or less is probably the best strategy.
Factor 5: Types of Credit
Next up we’ll talk about credit types: installment, revolving, and open. Each is different and you want to have a mixture to maximize this 10% of the score.
Installment is credit that has a fixed payment each month. These are your basic loans (auto, student, mortgage) that you must pay off over a fixed period of time.
Revolving is the most common. It is usually a credit card. A revolving credit is where credit is utilized and then paid off each month, so the net is that you have some utilization of the credit at all times.
If you want to extend the credit without paying(Don’t pay full balance), you can do so with an interest charge.
An open credit account is similar to a credit card. The difference is you don’t have the option to extend the credit; it must be paid in full each month.
Certain credit cards use this type of credit, but this also includes things like utilities and phone bills.
By responsibly using a mixture of these types of credit, you will positively influence your credit score. You don’t have to have all of them at once, but it is good to have them scattered into your credit history.
This section may also be scored by the actual number of accounts open. It may seem counter-intuitive, but the more accounts you have open and in good standing, the better your score will be. This is a sign of high trust, resulting in higher credit score.
Remember, use a mixture of installment, revolving, and open credit at any given time, but you don’t need all three at once. Having more overall accounts is also a positive marker.
More About Your Credit History
Finally, your credit history is an average of how long you’ve been utilizing credit. If you don’t have any credit right now, then opening a card is going to be a little bit of a ding to your credit score in the short term.
You’ll have to really utilize the other categories to raise your score, and it will take time to build. This is why it’s so important to open a card as soon as possible.
In fact, we recommend opening a credit card as soon as 18 years old, so your score begins to build while your finances aren’t as complicated later on.
An “Average credit age” number is used for this category, so having a few cards that are older will help your score.
This also means it’s important to not close your oldest accounts. If there is no annual fee, its best to keep the credit card open to help with credit history. Make sure when, or if, you are closing accounts that you do so strategically.
Bottom Line: You need to start building your credit history now. Open a card or two to start “maturing” your credit score so that when you open cards in the future it doesn’t affect your score as much