Sure, the lure of a credit card with frequent flyer points sounds too good to pass up, but it could hurt your credit score.
We’ve all seen the deals that make our sense of wanderlust flare up – sign up for a credit card today and receive thousands of frequent flyer points! But the fact is, regularly applying for new credit, regardless of the objective or amount, could have a significant impact on your credit score. Having multiple lines of credit can make you look financially unstable or unreliable, and could be a red flag for credit providers. So is chasing points really worth it?
Does applying for credit impact your credit score?
In a word, yes. The more lines of credit you apply for, the more unreliable you may appear to a lender. “Your credit score is an indication of your credit worthiness, and helps credit providers assess whether you are likely to pay back your loan or not,” says Dirk Hofman, Managing Director at creditsavvy.com.au .
When determining your credit score, agencies consider ‘the number of credit enquiries on your file ’ and ‘the amount of credit you have applied for’ so, as more lines of credit are applied for or opened, these factors increase, which doesn’t look good to the lender. “Would you lend your money to someone who already has multiple credit cards open, has had to borrow money from a payday lender and has had some difficulty paying their bills in the past? It’s all a matter of risk,” says Hofman.
How to avoid getting stung
Proceed with caution. Are the frequent flyer points worth the points subtracted from your credit score? There are some other factors to keep in mind when looking into these types of cards. What is the minimum spend per month? What annual fees are attached to the card?
While these elements of the card may hover in the background compared with the mega-points deal, they are still important considerations that need to impact your decision – because they’ll certainly impact your budget.
If you’re one to frequently change credit cards because you spot a great rate on a balance transfer, be warned: you need to stay on top of things. Once you overstay the interest-free period, the rate can really spike! And, when you factor in the way applying for credit impacts your credit score, you’ll want to tread carefully and make paying the debt off your top priority.
Bottom line? While it may be challenging at times, to maintain a strong credit score and keep your finances in check, educate yourself about these types of loans and how they really affect you. “At the end of the day, borrowing costs money and before you get yourself into debt, try to fully understand the cost of borrowing money, what the right type of loan is for you and what your obligations are under the loan agreement,” says Hofman.
Have you checked your credit score recently? Share your experiences in the comments section below.