Should real estate investors avoid opening new credit cards to maintain their credit score?
As a real estate investor, an excellent credit score can come in handy. Even as a house hacker, a high credit score can help you to secure the best interest rates on the market to maximize your profits.
While a good credit score can open doors to new investment opportunities, a bad credit score could just as easily close those doors. With that, a high credit score is something that most real estate investors should work towards.
Understandably, you’ll want to protect your high score whenever possible. Luckily, you don’t have to choose between a high credit score and travel reward credit card opportunities. Here’s everything you need to know about how your credit score is affected by new credit cards.
What makes up your credit score?
Before you can understand what affects your credit score, you’ll need to know what goes into your credit score. Here are the factors that determine your credit score:
Credit utilization. Your credit utilization rate reflects how much spending you put on credit each month. For example, let’s say you have a $10,000 credit limit and put $5,000 on your credit card in a month. Your credit utilization rate would be 50%.
Most experts recommend keeping your credit utilization rate under 30%.
Payment history. A consistent payment history is essential to a high credit score. If you make on-time payments, then your credit score will be impacted positively. However, if you miss several payments then your score will likely drop.
Lenders want to see a reliable borrower that can make their payments without any struggle.
Age of credit history. The older your credit accounts, the better. You can boost the average age of your credit accounts by choosing to keep older accounts open. With a longer track record, potential lenders can see that you are capable of handling your credit wisely.
As a side note, I still have an old Capital One credit card active that I opened in my early twenties. It only has a $1,000 limit and I get no reward benefits from it. I just keep it open as it has almost a 15-year history.
Credit mix. A mix of different types of credit accounts can be beneficial to your credit score. For example, an installment loan mixed in with several credit cards is a better mix than only installment loans.
Credit inquiries. Generally, a hard credit inquiry will cause your score to drop a few points. Any time you make a formal application for a new credit account, you should expect a small dip.
Each of these factors has an effect on your credit score. However, the most important factors are your credit utilization and your payment history.
Will a new credit card affect your credit score?
A new credit card may affect your credit score but not dramatically. Each time you apply for a credit card, you will initiate a hard credit inquiry. A hard credit inquiry can cause your score to drop by a few points. However, it will not be a dramatic drop. You can expect somewhere between a 10 to 15 point drop.
As you make on-time payments to this new card, your score will rise again. It may only take a few months for this one time impact to diminish or disappear.
Should you let credit score fears ruin your travel rewards adventure?
You should not let your fear of a credit score dip prevent you from taking advantage of travel rewards. It is completely possible to maintain a high credit score while enjoying the benefits of travel reward credit cards.
If you have a credit score above 740, then you are already near the top of the lending tiers. Lenders are excited to provide competitive loans to borrowers with such a high credit score. If your score drops a few points, it will not affect your borrowing options too much. For example, if your score drops from 775 to 760, it will not ruin your borrowing ability for future investments.
You can reap the rewards of premium credit cards without affecting your real estate prospects. Which card will you take advantage of first?