Question:
Hi, I love your show and never miss an episode! It’s a great way to learn something new while I’m working out.
I have a question. I’m a 25-year old medical student in my final year of school. I have $100k in school debt, and I have five credit cards with a TransUnion credit score of 771. I’ve always heard that I shouldn’t sign up for too many credit cards because it will ding my credit. Despite those vague warnings, I probably sign up for two per year and cancel them as I go. The terms are just too tempting. I get something like $700 per year in introductory bonuses, 2 to 5 percent cashback on all daily purchases, and other great perks.
One of the best perks has been to put daily purchases on credit cards with very long zero percent APR introductory rates, saving me a significant amount of loan interest accrual. I think my credit has not suffered too much, but at the same time I realize that the biggest factor dragging my score down is a short history.
I will graduate from school in six months and would like to buy a house/condo perhaps in 18 – 24 months. I have never paid a dime of interest in my life, nor have I ever had a late fee. Is there a major downside to taking advantage of these credit card offers?
Additionally, is there a period before buying a home that I should stop obtaining new cards in order to optimize my credit?
Response:
Carmen Wong Ulrich Dec 4, 2013 Former Host
You have a 771 and so young?! Amazing. And you’re carrying that number with six figures of student loan debt. You, my friend, are way ahead of the game. Why? Because most folks your age have student loan debt (though not that much) but don’t use credit cards wisely so they miss out on years of credit-score building. What you’ve done is carry multiple types of debt and have not been late or carried big balances on your plastic. All these behaviors make up over two-thirds of your credit scores.
However, don’t get giddy. I understand the whole open-and-flip trick where you flip credit card balances from one no-interest or low-interest card to another (that’s how I got out of credit card debt after college without paying a dime of interest!). But, if you continue to do it, you pay a price other than interest — your credit scores will suffer. This is because one factor that determines your credit scores is how much debt you have open and available too you. So, let’s say right now you have five cards with limits of $2,000 each. If you open five more and suddenly have access to another $10,000-plus in credit, red flags start going up. Lenders get scared that you could go on a spending spree and load up. On the flip-side, when you close and open cards you get dinged — at open, for the credit inquiry required to open the card and then at close, for the loss of credit access.
I know, I know, that’s a lot to keep track of. To find out how your credit scores work, head to the scoring headquarters of MyFico.com. Don’t worry: You’re in great shape — just get rid of that revolving credit card balance ASAP to push you into 800+ territory and yes, time itself will work in your favor!
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