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Blazing a Trail Towards Financial Independence

Blazing a Trail Towards Financial Independence

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How to Move Up the Credit Score Leaderboard

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Credit cards can be a polarizing topic in the personal finance community.  On one end, you have Dave Ramsey and his cash envelope system which abhors the use of credit cards.  At the opposite end you have the travel hackers, who churn credit cards for travel rewards.  The Heartland on FIRE household has covered the full range of the credit card usage spectrum.  In 2017 we essentially did not use our credit cards.  However, over the past year, we have become big proponents of credit cards.  As such, we have been paying closer attention to our credit score.  Let’s explore whether a credit card is right for you, and if so, the importance of a high credit score.  Also, I’ve thrown in a quick tip to raise your score.

Should I Use a Credit Card?

The answer to this question is:  IT DEPENDS
I believe whether a credit card is right for you comes down to where you are in your financial journey.  If you are just starting out, it’s probably not the right time.  You are probably still trying to understand your spending habits.  Without a good understanding of you spending you are at risk of only making minimum payments or flat out missing them.  Paying credit card interest is like breaking the first rule of Fight Club in the FI community.
Going cardless for a time can reconnect you to your spending.  Swiping a card is so quick and effortless that there is little to no sting attached to spending money.  However, digging through your wallet or purse and forking over the greenbacks has a certain tangible loss associated with it that can stick with you.  In the beginning this “pain” can be a useful tool in helping to get your spending on track.
Once you are confident that your spending is defined (and under control!!) credit cards can enter the picture… and their benefits should not be taken lightly.

Credit Cards Can Fuel your FIRE!

Even the most hardcore and frugal Financial Independence Retire Early (FIRE) seekers spend on the order of $40,000 per year.  Put this onto a cash back card earning 1.5% and viola! You’ve earned an additional $600 a year!  Not to mention, that doesn’t take into account any signup bonuses!
Even better, most travel rewards cards can provide earnings of $0.02 to $0.03 per point (1 point typically means $1 spent), which increases your $600 to $800 or $1,200 per year.  Most of the best travel cards offer up to 50,000 bonus points (easily $1,000 in benefits) if you meet spending goals (usually around $3,000 in 90 days).  If you are putting your necessary expenses on your card it can be very easy to meet these milestones.  A great source for learning how to maximize travel rewards is the Choose FI Podcast and Travel Rewards page.
We were a bit late to the game this year, but we used travel rewards to cover most of the airfare for a family of 4 to Disney World!

Why a High Credit Score is Important for FIRE

If you want to really max out your rewards, it is critical to get approved for the best rewards credit cards.  Your credit score is a major factor in whether your application is approved or denied.  Additionally, each new card requires a hard credit inquiry, which will lower your credit score a few point for about a year.  If you choose the path of credit card churning to really rack up the signup bonuses then you will be incurring multiple credit inquiries a year.  A marginal score at the beginning of the year could fall below the optimum levels for the best cards by the end of the year.
Outside of credit cards, a high credit score is looked upon favorably by potential employers and can qualify you for lower interest rates from mortgage lenders.  Most of us have a 9 to 5 job and a mortgage, so the cost impacts associated with a high credit score can be significant.

How can I Improve My Credit Score?

  • Get your annual free Credit Report from Equifax, Experian, or TransUnion, or sign up for an account like Credit Karma which allows you to review your score and its influencing factors for FREE!
  • Check your information and if you see inaccuracies, reach out to the pertinent parties to set the record straight.
  • Always make your payments on time (duh!)
  • Keep your credit accounts open to increase the age of your credit.  (Note: before doing this make sure you understand your annual card fees if there are any.  It may be worthwhile to close a card if there is an annual fee on a card you don’t normally use).
  • Keep your credit utilization below 30%.  Credit utilization is the ratio of your account balance over your credit limit.  It has a high impact on your credit score.  As an example if you have a $2,000 account balance and your limit is $20,000, then your utilization is $2,000/$20,000 = 10%.

Stay on top of these items and soon you’ll be asking such questions as:

High Score?

Is that Bad?

Did I Break it?

Quick Tip to Improve Your Credit Score

Your credit utilization has a large impact on your credit score.  You can control your credit utilization in two ways: either keep your spending low enough to stay below the 30% threshold, or increase your credit limit.  One problem with keeping your spending down is you could end up missing minimum spending goals that are needed to qualify for lucrative bonuses.  Your credit card company will often slowly raise your credit limit as you establish a good history of card usage and on-time payments.  But this can be a slow process.

You can also directly request the credit card company increase your credit limit. This may sound daunting, like you will to submit long forms, backup info, and wait weeks for a response.

But it is really not!  In fact, many credit companies allow you to quickly request an increase online.  The review process duration can depend on the size of the increase requested, with larger increases requiring more scrutiny and time.  However, smaller increases (on the order of $2,000) can often be reviewed an approved nearly instantaneously, and without a hard credit inquiry.

Case in point: During research for this post I searched for how to request a credit limit increase for our primary credit card (where we have cash rewards card).  I found this article from Credit Card Insider which provided a great step by step overview of the process for several card companies.  I jumped on my phone, while sitting at my daughter’s gymnastics practice and went to the card’s website and found a link to “Request Credit Limit Increase” (HINT: with many of the companies you need to go to the full site, not the mobile version).  I entered some very simple info: address, annual income and source, home type, and mortgage payment, and of course, what credit limit I was requesting.  I clicked submit and was waiting for about 30 seconds.  I figured I would get a message acknowledging receipt of the application… but I got an instant approval instead!

All told, including reading the Credit Card Insider article, discussing with my wife, requesting the credit limit increase, and receiving approval, the whole process took less than 10 minutes!  For a 30% increase in our credit limit!!

Bonus Tip:  Check to see if your mortgage lender will allow you to remove your escrow account (taxes and insurance) from your mortgage payment and pay these with a credit card with low to no convenience fee.  Paying taxes and insurance with your credit card allows you to meet your minimum spending goals without having to buy additional goods and services!  But you must weigh this against the convenience fee you will likely be charged to pay with that card. Additionally, doing so can help your monthly cash flow throughout the year, allowing you to stash additional funds into savings or investments throughout the year. – credit goes to the Choose FI podcast for this one.

In summary, credit cards can be powerful tools in your quest for FI, once you are ready for them.  Understanding where you can find your credit score, how your credit score is calculated, and more importantly, knowing what credit score factors are under your control, are important to help you maximize card benefits and rewards.

Kudos to Mrs. HoF for this week’s post idea!

Thanks for reading!

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Comments

  1. Love the bonus tip, and I’ve got an added secret…

    You don’t need to remove your escrow account to pay your tax/insurance separately. You can pay your insurance company directly at any time throughout the year, over the phone or online. Since both you and your bank are paying for the same policy, the insurance company must return whatever money is overpaid. This comes as either a credit to your escrow account, or, a check posted directly to you.

    So if your bank won’t let you remove the escrow account, that’s OK, just pay your insurance bill directly anyway with your credit card.