Sherlock Holmes and the Mystery of the Credit Score

Every time Sherlock Holmes solves a mystery he uses logic and deductive reasoning to solve riddles that everyone else thinks are inexplicable or supernatural. Credit scores are far from unexplainable, but they are confusing and a bit spooky.  For example, I’ve heard repeatedly from friends that they don’t want to get a new credit card because they are nervous about what getting a new card would mean for their credit score.  But like a Sherlock mystery, credit scores are a puzzle that can be solved.  And in the end, we’ll find that opening a credit card doesn’t have to hurt your credit score, and my even help it.

First, what is your credit score?  At first glance, it appears to be a number that can change for reasons that only Sherlock, given a few days to investigate, could explain (and I mean the Benedict Cumberbatch Sherlock). There are in fact several different types of credit scores.  Your FICO score is the current gold-standard, the one most lenders/landowners look at.  Your score is not static, nor will it be consistent.  I have four credit cards that give me free monthly looks at my FICO score, and draw from two different credit bureaus (there are three main ones: Transunion, Equifax, and Experian—a trio not even Sherlock’s arch-enemy Moriarty himself could have dreamed up).  Among the reports that pull from the same credit bureau, my numbers are different month-to-month—not wildly, but within a range of 20-30 points, different.  Which is not surprising: if you called up Equifax and asked them to explain their credit score calculations, they would first direct you to a phishing website, then ask you to hold for the sound of a whoopie cushion played to the tune of Fantasia’s opening score, and then tell you it is a complex formula, based on a large number of factors, all of which are given different weight, and change from day-to-day.

So what affects your credit score?  As confusing as the number is, there are some concrete clues we can make use of.

1) On time payments. Pay your credit card/loan payments on time every time.

2) Type of credit accounts.  Think credit cards and house/car/student loans.

3) Credit length.  This means the age of your oldest account, the average age of your accounts, and the age of your newest account.

4) Number of hard inquiries.  Hard inquiries are when people look at your credit, and the check is noticed by the credit reporting bureaus.  These may include credit checks when you apply for a credit card, mortgage, etc.

5) Revolving utilization. If you pay off your credit card in full every month, your revolving utilization for that card is zero.  If you carry a balance, that number goes up.  Pay your bills ahead of when they are actually due (i.e. when your credit card company reports your credit utilization to the financial bureaus) and your utilization will be zero!

6) Available credit.  More cards, higher credit lines on each card, equals more credit available.  You want this number to be high.

7) Outstanding loans.  Student loans.  Mortgages. Car loans.  Diverse loans are good, as long as you are paying them down.

Which brings us back to what effect opening a new credit card for the rewards does to your credit score.  The answer is not much, although it might hurt a very little in the short term, and should help in the long term.  It will likely result in a hard inquiry, so that might hurt your score.  It will help because you will have more credit, and your credit utilization should go down, as long as you don’t let having a new card affect your spending habits. It will decrease the average age of your accounts, but over time, this effect will diminish.

So, let’s look at this with a magnifying glass, shall we Watson?  Dive into my wallet with me.  I opened four new credit cards within the last year, and closed one, in an effort to bring my wallet under control and maximize my reward points.  My cards all offer free FICO reporting, so I can see how my credit score is doing.  In the last year, my score report from one credit card showed that my score went up by 8 points; another card reported it went down by 5 points; a third reported it went up by 1 point; and a fourth reported it did not change.  In other words, if done right (a.k.a. you pay it off in full every moth) opening a credit card does not hurt your credit score.  Just as long as I remember to pay my credit cards off in full every month, I am free to enjoy all the perks and rewards, and bask in the knowledge that my credit score is healthy while I read Sir Arthur Conan Doyle in the San Diego sun.


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