Q: Hey there’s a good promotional offer on this credit card I’ve had my eye on for a while now. Haven’t applied for a new card in years and recently I heard that opening a new credit card will hurt your score. Is that true?

A: Will applying for a new credit card lower your score? Probably. But by how much? Well that depends…

There are 2 types of credit checks – soft and hard (hmm… easy opportunity for a joke here but I’ll leave that out). The latter – hard credit inquiries – are the type that might negatively impact your score.

Anytime you apply for credit – whether it be a card, loan, or even a new phone account – a credit check is performed. This is almost always a hard credit check and yes, it will show up on your credit report for 24 months. Fortunately, the FICO scoring model will only count them during the first 12 months, with their greatest impact is during the first 6 months.

So how much does applying for a credit card affect your credit score? Well, the higher it is, the more likely it will be hurt.

• If you have an extremely high FICO score of say 810, one credit inquiry may knock that down by as much as 10 points (based on experience and consumer feedback).
• However for “many people” the impact of applying for a new credit card will be “less than 5 points” or it “may not affect their FICO score at all” (source: MyFICO).
• For those with below-average or bad credit, the chances of it negatively impacting your score are lower, in comparison to someone with good to excellent credit (source: consumer feedback).

When you shouldn’t – and should – be worried

If you plan on applying for a mortgage or home loan within the next 6 months, then it’s probably best to not apply for any new credit cards right now. Even though the FICO score impact will probably be minimal, it’s better to be as squeaky clean as possible with major loans such as these.

But if a mortgage or home loan is not happening within the next 6 months, then I wouldn’t worry about possibly getting hurt with a [slightly] lower score. Remember 12 months from now that inquiry won’t affect your score whatsoever.

Actually if you don’ have plans to finance a home in the near future, then right now is actually the best time to apply for credit cards. Why? Because the average age of your credit accounts is part of your credit score. So if you’re going to get new card(s) you might as well do it now, so they have time to age. That way by the time you do apply for a mortgage or major loan, those new credit card accounts will be year(s) old and that should help boost your credit worthiness, assuming you manage your accounts responsibly.

Does using a temporary online credit card really make sense?

Over a decade ago during the early days of Paypal, I remember when they launched the feature to generate temporary credit card numbers for online shopping (well technically they were debit cards numbers, but you catch my drift).

One time I used this virtual number for a purchase from shady merchant and lo and behold, they ended up pounding me with unauthorized charges afterward. As far as protection goes, it was essentially worthless because the disputed charges still wiped out my Paypal account balance.

This is the problem with temporary credit card numbers… ultimately they do nothing to stop fraud. As long as the virtual account number is active, crooks can charge to their heart’s content – using up your credit limit or shrinking the available spending power on your debit card.

There’s really only one advantage

Now if the aforementioned happened, obviously you can dispute the charges and get your money back if they were unauthorized. But that offers no advantage over disputing charges made on your regular debit/credit card numbers: both involve the same dispute process and both will distort your account balance (at least until the charges are reported and reversed).

At the end of the day, the only advantage of using a temporary card number is that if it’s abused, you only have to cancel that number instead of your main account number.

Some are more dangerous than others

You can create temporary credit card numbers for Chase, Citi, Bank of America, Discover and most other major issuers (excluding American Express). But not all are created equal…

• The “use everywhere” type – Some only give you one virtual account number. You can then use it whenever you want for online transactions. The problem with this type is that over time you will be using it at multiple merchants. This is how Paypal does it.
• The one-time use type – With this kind, the temporary number is generated for one-merchant only. That way if the number is compromised, no one else can use it. Citi offers this as a free feature on their credit cards, including their popular Forward card. Bank of America’s “ShopSafe” is similar but with fewer features.

Between the two types, in theory, the first is more dangerous, since you can’t restrict using it to a specific merchant. So I you insist on using these, go with the ones that gives you a unique number on a per-merchant basis.

But never, ever use a debit account

The problem with a Paypal virtual credit card number (and all debit cards) is that if your account gets hit with fraudulent charges, your balance will be affected. Even if that’s only temporary and you are able to reverse the charges, there will still be a period of time where the money isn’t there and that could cause checks to bounce if it happened with your checking account. This is why debit cards are so risky to use.

Regular readers will surely know what it is – but in case you’re a newbie – first let’s do a quick overview of the debt to credit ratio definition:

In a nutshell, it’s the amount of credit you are using.

So let’s say you have a credit card with a $10,000 credit limit. On it you have a $4,000 balance. Your debt to credit would be:

4,000 ÷ 10,000 = 0.40 ratio a.k.a 40% utilization

Obviously an example like this is easy to figure out in your head, but for more complicated numbers here’s how you would figure out the debt to credit ratio with a calculator:

Step One: Enter the amount of your balance
Step Two: Press “÷”
Step Three: Enter the amount of your credit limit (or in the case of a loan, the original starting amount)
Step Four: Press “=” and voila, you have just calculated your ratio

By the way, this is also known as your credit utilization ratio. And some people mistakenly refer to it as the credit to debt ratio, but think about it- that would involve flipping the order of numbers in the calculation, so it’s not credit to debt.

Beware of the BS…

So that brings us to the question, what is a good debt to credit ratio? Is there such thing as an ideal ratio that will magically increase your credit score?

The answer is yes and no. Here’s why…

For starters it’s important to point out that the FICO credit score formula is secret – if anyone tells you they have the definitive answer as to the magic credit utilization ratio they’re lying. The best anyone [myself included] can do is to make an educated guess based upon all the various clues that FICO has given over the years.

Clue #1 – Averages From “High Achievers”

If you use MyFico.com to check your score they will tell you about a category called “high achievers” which is those who have a FICO score of 760 to 850. They have said this about them:

• On revolving credit accounts (i.e. credit cards) the average debt to credit ratio is 7%.
• On installment accounts (i.e. mortgage and other loans) an average of 35% has been paid off (as in 35% of the original loan amount)

Understandably so, the ratio on mortgages and other loans can be high (35% paid off = 65% utilization). While having installment loans on your credit record is important, the debt to credit calculation on them is largely a null issue. This is why the conversations surrounding this subject are almost always about credit cards.

Clue #2 – The Credit Utilization Brackets

Myself and many others who study credit (such as personal finance writers) frequently say you should not use more than 25% or 30% of your credit limit on a given credit card. Going beyond that and you will have a high debt to credit ratio.

However if you want to be real nit-picky, a number of clues have been given which suggest the existence of brackets, so to speak, when it comes to credit utilization:

• <10%
• 10 – 19%
• 20 – 29%
• 30 – 49%
• 50 – 84%
• 85 – 100%

I didn’t just pull those numbers from where the sun don’t shine. They were actually posted by a moderator on MyFICO who has 30,000 posts under their belt. While the exact bracket ranges for 10% and above may or may not be accurate, there is ample evidence to support that having a debt to credit of 9% or lower is best and falling within any bracket above that will adversely affect your score (the higher you go, the more it will hurt).

Clue #3 – FICO “Damage Points”

Back in 2009 FICO pulled the curtain back a bit on their algorithm, by releasing a list of “damage points” which are common mistakes and what their effect on your credit score will be.

While most of FICO’s damage points apply to severe offenses like foreclosure, bankruptcy, and debt settlement, there were some a few clues relating to the debt to credit ratio credit score impact, at least when it comes to maxing out a card:

• 680 credit score with 1 maxed out credit card = 10 to 30 point drop
• 780 credit score with 1 maxed out credit card = 25 to 45 point drop

Source: FICO Credit Missteps

Note: Being “maxed out” allegedly includes any ratio that falls within that estimated top bracket of 85% to 100%.

These damage points don’t tell us much, but they do confirm the fact that having too high of a balance – even if it’s only on one credit card – will negatively impact your credit score.

The truth about the true impact

What is debt to credit ratio based on… individual accounts? The cumulative average of all accounts?

The answer is both. The FICO scoring will take into account the credit utilization on an individual as well as a cumulative basis. Unfortunately there’s no way to know exactly how each is weighted. Nor do we know their combined effect.

I have seen many media sources say that credit utilization makes up 30% of your credit score… that’s wrong and they’re not reading FICO website very carefully.

What FICO tells us is that the “amounts owed” category makes up 30% of your score. However, debt to credit isn’t the only thing in that category. There are other components involved and you can see them on their “What’s In Your Score” page.

So the truth is that credit utilization – when combined with other components – makes up 30% of your credit score. Kind of vague, huh? Yeah that’s the point… remember FICO guards their formula like the recipes for Coca-Cola and Colonel Sanders fried chicken.

So what’s the ideal ratio?

With all that said, we’re still left with the question: What debt to credit ratio is ideal?

Chances are, you will get a different question from each source you consult. My personal take? The answer isn’t black and white. I think the degree of impact largely depends upon how long and robust your credit history is.

For example, CreditCardForum veteran jeffysdad played the 0% arbitrage game by borrowing about $54,500 of a $55,000 credit limit on a card and putting that money into a savings account. His score? “I don’t think it’s ever been below 770 and has been as high as 800 or so over the last several years.”

Meanwhile on the other hand, there are a plethora of posts on the forum from those newer to credit, who see their credit score plummet because of a high debt to credit ratio (even if it’s just on one account).

What’s the lesson here? FICO is like Google. If you think their algorithm is straightforward and easy to decipher, think again! While there’s no denying a good ratio is low, at the end of the day how your ratio affects your credit score will be influenced by many other factors, too.

There’s a difference between what is lowest credit score possible and the lowest you can actually get [even if you tried to do bad]

Important: All the scores I will be talking about are in reference to FICO – which is the #1 most widely used for lending decisions. There are a lot of imitators out there, like VantageScore, but they’re very rarely used.

Scores can range from 300 to 850. But even though 300 is technically the lowest credit score possible, it’s very unlikely you would hit it even if you tried. To get that you literally would have to do everything wrong and have absolutely zero positive credit history whatsoever.

In the real world, the lowest credit score you can possibly get will probably be around the high 300′s. For example if you:

• Just went through a bankruptcy and for the first time it is showing on your credit report
• If you have defaulted on multiple debts and had little to no payment history on those accounts prior to default (i.e. applying for a loan and defaulting a couple months later)
• You have recently gone through a foreclosure and have had severe late payments and/or defaults on at least one other line of credit

In those types of situations, you may fall into the 300′s but the odds are slim (only 2% of the population has a score between 300 and 499). Needless to say, hitting the rock-bottom lowest FICO score of 300 is literally unheard of.

But either way… even if you’re not at the absolute worst, you might as well be since anything under 600 is mostly useless when it comes to getting a credit card (unsecured), a mortgage, or car loan.

How to improve a low credit score?

Surprisingly, you can make your way from the poor credit category to the “fair” category (scores in the mid-600’s) sometimes in just a year or two, as long as you make the right moves. Here are 5 things you definitely will want to do:

1. Maintain your good standing accounts, if you have any – Have any accounts you haven’t screwed up yet or are still open? Good. Then make sure they stay that way.
2. Open secured accounts – You can have the lowest possible credit score on earth and still qualify for secured credit cards, which is a card where you put up a deposit. Same holds true for secured loans, which you can get through a bank or credit union. If you’re fronting the cash, you can typically get approved regardless of how bad your credit score is.
3. Check your credit reports – Is it possible you are being penalized for something incorrectly? Make sure you check your credit reports, to ensure the negative information that is weighing you down is accurate.
4. Consider credit repair services or self-help guides – Sometimes you can get negative entries deleted from your credit report due to technicalities in how they were reported.
5. Have patience – As your negatives start to age, your low credit score should begin improving even if you were to have no new accounts. Unfortunately you can’t speed up the clock, but at least it’s reassuring to know that every month that goes by, your bad debt is a month older in the eyes of the credit scoring formula.

How high will you need to go?

The lowest credit score to buy a house with a mortgage might be as low as 620. But I stress that’s a big might because even though FHA underwriting guidelines don’t have a minimum score set in stone, if you are below 620 you will not be eligible for automatic approval and have to jump through many hoops with a manual process, which may not even yield results.

But in reality, in this economy it can be hard to get approved with anything below a 700. However if you are buying a foreclosure directly from a bank, with that same bank also providing the mortgage, they have been known to bend over backwards to get the approval so they can get that foreclosed home off their books.

The lowest credit score to get a credit card that is unsecured will likely be at least 650. With that type of score, you might be able to qualify for an entry level card for fair credit. For the good reward cards you see advertised on TV, plan on having a 700 or above. If you are in the low 600’s or below, you may need to go with a secured card.

The lowest credit score to get a car loan ultimately depends on what type of interest rate you are willing to pay. To get those 0% offers you see advertised on new cars, you will probably need to be in the 700’s. If you’re in say, the 500’s, it still is possible to get a car loan but you will have to pay through the roof with an excessive APR rate.

Have a low score yourself? Then please share in the comments what it is and the circumstances that got you there.

So is 800 a good credit score? Well according to Fair Isaac (developer of FICO) only 13% of Americans have a credit score above 800. When you consider the national average is 692 and the median is 723, being in the 800 and over crowd is an exclusive club indeed. But how do you get there?

If you want to know how to get a 800 credit score, you should go straight to the horse’s mouth….

• MyFICO – This is FICO’s site for consumers. Yeah, a lot of it is trying to sell you on their credit score monitoring services – but aside from that – there’s a great deal of free information in the education and community sections of their site.
• Members of the 800 club – Know someone with a FICO score in this range? Grill them on the types of accounts they have, their credit utilization, payment history, and more. Want someone to start with? Well in a recent post I wrote about my credit score of 790 which you may find useful (used to be 800 before some recent credit inquiries were made).

Is that too much work? Okay, here’s a cheat sheet for you…

If you don’t want to spend your waking hours scouring the MyFICO site and interrogating those who already have a high score, I’ve created the following cheat sheet just for you.

This information is derived from the clues that MyFICO gives about so called “High Achievers” which are those with a score of 760-850, as well as my own experience and knowledge.

1. Age of accounts

Unfortunately this is one of the few things that you can’t control. Just like you can’t accelerate the aging of a fine wine, nor can you speed up the clock on the age of your credit account.

The oldest revolving account (translation: credit card) for the “high achievers” is pegged at 19 years on average. Furthermore, the average age across all their accounts is between 6 and 12 years.

What does this mean? Age discrimination that’s 100% legal! Even though I first hit 800 in my mid-twenties, that is extremely rare and for most, they may not hit that number ‘til their thirties.

2. Bad debt

Collection or public record on your file? On MyFICO it says that “virtually no” high achievers will have that. So even if you do everything else right, don’t think you can get away with having that one ER bill charged off or that old credit card from 5 years ago in collections.

Don’t get me wrong, you can have charged off debt and a few years later, it might be possible to have a FICO in the mid-700’s. But if you are shooting for a credit score over 800, then you need to seriously do whatever it takes to prevent charge-offs, or if they’re already on there, find a way to get them removed.

3. Number of accounts

According to a post by a MyFICO moderator, 6 accounts currently being paid as agreed is the average for high achievers. Moreover, there’s an average of 4 to 5 credit cards on file (which includes accounts both currently open and those that have been closed but are still on the report). Just a little FYI though – I have many, MANY times more cards than that!

So for all the haters out there that love to harp about how evil credit cards are… just remember, when used responsibly, they can be quite helpful for your credit score! If you honestly think you’re going to get to 800 and above by only having a student loan and car loan on record, then I have some swampland in Florida I would like to sell you.

4. Mix of credit

It used to be that you could obtain a killer score with just cards or just loans, but when the formula was tweaked a few years back that all changed.

If you want to know how to get an 800+ credit score nowadays, then you need to acknowledge and accept the fact that a good mix of different credit accounts is imperative:

• Revolving accounts – This is primarily credit cards
• Installment accounts – Loans where you pay a fixed amount each month. Think mortgage, car loan, etc.

Those are the two main categories and then within each, there are also variations which can affect your creditworthiness. For example, TransUnion considers a bankcard with a credit line of $10,000+ as being a “premium bankcard account.”

Since FICO’s formula is secret, no one knows exactly how they gauge the importance of a given credit limit of something like a “premium bankcard account.” But one thing is for sure and that is I’ve never seen someone with an 800 score that only has toy limits of one or two thousand. So don’t play around, play with the big boys and get some five-figure fun for your credit limits.

5. Payment History

Depending on the source you reference, having even just one 30-day late payment reportedly may knock down your score by up to 60-120 points (the higher your score is, the greater the fall). And the higher you are to begin with, the longer it will take to recover (it might be years).

Now just to clarify – as I constantly hear confusion about this – any payment that is up to 30 days late can be treated as a 30 day late payment. You see, the “30 day late” actually covers everything from 1 to 30 days late.

That being said, even though creditors have the right to report all non-paid accounts as late the day after the due date, that is extremely rare. Most won’t report it as late unless it’s not received by the next due date, however don’t bet the ranch on that because every lender operates differently (so be safe and pay on time).

6. Credit Inquires

Every time you apply for some form of credit, whether it be a credit card, mortgage or loan, a “hard” credit inquiry is made. This hard inquiry is recorded on your credit report. It stays on there for 24 months but will only be able to affect your score for the first 12 months (with the greatest impact during the first 6).

The MyFICO moderator posted that for the high achievers category, 72% didn’t apply for credit in the past year. That being said, you can most definitely have an 800+ score even with inquiries affecting it. You just don’t want to have too many. From my experience anything beyond 3 per year is a no-no if you want to keep your score above 800 (mine dropped to 790 from having that).

7. Utilization

Last but not least, we come to credit utilization – the percentage of a credit limit (or loan) which is being used. It has been a hotly debated topic at CreditCardForum on multiple occasions.

If you go by the high achievers, then the average is 7% on the revolving accounts (a.k.a. credit card accounts). And indeed, this is right in the neighborhood of mine which came in at 6% last time.

One of the lesser talked about forms of utilization is that which applies to installment loans. The MyFICO moderator highlights that of a loan’s original amount, for the high achievers an average of 35% has been paid down.

When you think about it, the installment loan utilization rate probably correlates closely with the average homeowner who bailed on their underwater mortgage during this real estate crisis. Why? Because those underwater were much more likely to be (a) recent buyers before the bubble burst, and/or (b) people who bought with little to nothing down. It makes sense that someone who has already paid off 35% of their mortgage is far more likely to stay in their house and keep paying.

One last important note – credit scores are not created equal!

I bet you 10 to 1 that sooner or later, some doofus will post a comment below saying something like “I have a 880 credit score” or “I’m only 20 and my credit score is already above 800.”

Well FYI, most credit scores which are peddled to consumers these days are imitators to FICO and are drastically different. FICO runs 300 to 850. There are a ton of others out there, like VantageScore, that run 501 to 990. Then there are those which aim to “simulate” FICO and might do a poor job at that – I’ve heard them being off as much as 70 or 80 points.

Unfortunately if you want your true FICO score which is not an estimate, there are only a couple places where consumers can buy it. This MyFICO review will explain further.