Are your frequent flyer?point hacking activities affecting your credit score?
I love a good frequent flyer deal just as much as the next gal.
I?ve got a system worked out that maximizes the number of frequent flyer miles we can earn based on our normal expenditure. Our goal is to have enough points to fund two business class fares around the world at the first available opportunity to holiday child free we get. So realistically this is a long term (aka 15 year plan). Sigh.
However, in the hope that the opportunity may miraculously happen in a much shorter time frame, I’m the first to twig to a credit card deal giving away a large number of bonus Qantas Frequent Flyer points.
I?ve in-fact opted into one of these deals and jagged myself 50,000 points as part of the process. Quite a lump really, considering an upgrade to business from a paying economy fare is around 80,000 points.
There are those that do this religiously ? in fact, there are whole blog sites dedicated to the careful and calculated accumulation of points in this way.
The question that always comes up though ? is there a point at which the chase for points starts to impact our credit rating.
What is the cost to our credit score?
The facts your credit report
The Australian Retail Credit Association states that 59% of Australian?s don?t understand how credit reporting works. So here?s a quick overview.
A credit report is prepared by a credit reporting body (there are several) and outlines your credit history and credit arrangements.? Your credit score is a three digit number calculated from your credit report and is a numerical representation of your credit worthiness.
Your credit report includes information about credit applications or credit enquiries you have made. It won?t necessarily state whether or not credit was granted for each credit application that is listed. It may include instances where you have made late payments and it will include all instances where you have defaulted on your credit arrangements within the last 5 years.
A credit default is defined as a bill or loan payment of $150 or more that is unpaid after 60 days from its due date and you have received two written notifications, following new regulations that were introduced in March 2014.
Why is your credit report important?
Any company that provides credit to you (like a bank, utility provider or other service company) can ask for a credit report to help them determine your application with them for a new contract or product.
It provides them with an indication of the likelihood of you being able to make the repayments on their contract with you. But while it is important, it is not the only factor in their assessment of your application.
The impact of credit card applications
The long and short of it is – every time you apply for credit you?re adding to your credit history.
Every time you apply for credit and a credit provider obtains a copy of your report, an enquiry is added to your credit report. This includes, but not limited to, any credit card, mortgage or utilities applications you make.
The largest credit bureau in Australia, Veda Advantage, says that applying for lots of credit cards is not a good idea.?Lenders may take a negative view of a relatively high number of enquiries made in a short space of time, which may in turn affect your ability to obtain credit.
If a lender see that you have made several requests, it could raise a red flag ? indicating that you are short of funds (or have existing debts). Creditors want to do business with people who are not so desperate for money that they are filling out loads of applications around town.
Having said this, this perception seems to only apply where a ?cluster? of applications to different lenders has been made in a relatively short period of time.
If you are making a single application for a credit card with bonus rewards points at one point in time ? then this activity is unlikely to fall within the same parameters as someone who is making multiple applications to different lenders simultaneously, because they are financially desperate in need of additional credit.
The danger with multiple cards is of course the temptation to spend on them. Applying for a new credit card to take advantage of bonus points is one thing – but then having an additional $5,000 or $20,000 available credit is something to be mindful of. Spending above what you can afford to repay will obviously land you in hot water and impact your credit rating negatively through late payments, minimum repayments or worst case, default.
However, having more than one credit card can actually be beneficial for your credit rating, due to the credit utilization ratio. This ratio is influential when it comes to calculating your credit score.
Credit utilization is a fancy way of looking at how much of the credit you have, that you are actually using. So if you have a combined credit limit of $50,000 across all your cards and you have debts of $5,000 you have a credit utilization ratio of 10% (which is good). Industry opinion states that between 10% – 30% is ideal.
Cancelling your credit cards can impact your credit score poorly where it means your total credit limit drops – sending your?utilization ratio upwards. Say you decide to cancel your card with the highest limit of $20,000 then you now only have a total of $30,000 with a $5,000 outstanding debt. This means your ratio goes up to around 16%. So it’s worth being mindful of this fact when looking to cancel cards you may have applied for purely to take advantage of points bonus.
In the grand scheme of things – it’s not the be all and end all
The number of inquiries recorded on your credit report is just one piece of information a lender may consider when assessing your application for credit.
They look at a variety of information on your application form to assess your application, including if you are an existing customer as well as your credit report and / or credit score.
Some credit providers don?t use credit reports at all. Some will still use the old system and others have moved towards comprehensive credit reporting ? defined by the changes introduced in 2014.
You can order a free report at least once a year from credit reporting bodies ? without impacting your credit score, remembering that credit inquiries can impact your rating.
You can also get an instant credit score from this company?s website (without impacting your score) which will give you an immediate indication of where you stand credit wise.
It’s seems there is no definitive answer – and the best approach is really to make a sensible judgement based on your own circumstances, being cognizant of the above information.
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