This post contains references to products from one or more of our advertisers. We may receive compensation when you click on links to those products. For an explanation of our Advertising Policy, visit this page.
It’s no surprise that travel rewards credit cards get a lot of coverage here at TPG. By strategically applying for and then utilizing these cards, you’ll unlock the ability to redeem your hard-earned points and miles for things like first-class flights and luxurious hotel rooms. However, there are a number of misconceptions out there when it comes to credit cards, so today I’ll continue our new series that debunks these myths and allows you to begin planning for your next vacation.
Previous entries included having too many cards, closing a card you don’t use, not paying your balance in full, paying an annual fee and whether your income affects your credit score. Today I’ll consider another aspect of your financial profile that seems like it should have an impact on your ability to be approved for a card.
Myth #17: My assets affect my credit score.
There’s a popular misconception out there that high net worth equals a high credit score. As with the topic of my previous post, on the surface this makes sense. If you own a home, own a car, have large investments accounts or maintain significant balances in your checking or savings, this should theoretically make you more attractive to credit card issuers. After all, you’re probably less likely to default if you have significant capital to cover your monthly purchases.
However, when it comes to computing your actual credit score, your collection of assets (or lack thereof) doesn’t have any impact. Once again, let’s revisit the five main factors that contribute to your FICO score, the one most frequently used to determine creditworthiness:
- Payment history
- Amounts owed
- Length of credit history
- New credit
- Types of credit used
As discussed before, these five factors are weighted based on how important they are to your score:
As you can see, none of these are explicitly tied to assets like bank accounts or other personal property. Instead, they all relate to how well you have managed the lines of credit that have been extended to you. Just because you’re a high-net-worth individual doesn’t guarantee that you can keep your credit utilization rate low, pay your bills on time, etc.
Now, that being said, there is one important way that your assets can impact your credit score: when you have installment loans associated with those assets (like a mortgage or car loan). These types of accounts give you additional ways to build up your credit history, and they can also vary the types of credit you are using. Believe it or not, owning a house and car free and clear could actually be a negative when it comes to your credit score, as your credit profile may be limited to only credit cards.
In addition, while your assets won’t directly impact your credit score, they do play at least a small role in the credit card application process. Just about all issuers will ask the following questions (in some way) when you apply for a new card:
- Do you have a checking account, savings account or both?
- Do you rent or own?
If you answer “both” to the first question, that may signal that you are financially responsible, and owning a home could also help you be viewed in a positive light. However, remember that the issuer has no way to verify the authenticity of these two answers (unless your accounts and mortgage are with the same bank), so they won’t have any formal impact.
For additional recommendations for managing your credit card account(s), be sure to check out my Ten Commandments for Travel Rewards Credit Cards.
Many new readers may think that getting into the points and miles hobby (especially with premium cards like the Chase Sapphire Reserve) is limited to those with significant assets and high net worth. While this does apply to certain cards like the JP Morgan Palladium Card, the most important factors on your credit score are those related to how well you’ve managed your credit through the years. Don’t let a perceived lack of assets prevent you from applying for a new card! Hopefully this post has shed some light on why that’s the case.
What are your thoughts on assets and their impact on the credit card approval process?
Featured image courtesy of Caiaimage/Sam Edwards via Getty Images.
The Points Guy Assessment:
The Chase Sapphire Preferred is a great pick for the beginner and the frequent traveler. The CSP has superb travel benefits, double points on certain purchases, and a 50,000 point sign up bonus. The $95 annual fee is waived the first year so this puts it as one of the less expensive cards, while still allowing you to earn one of the most valuable point currencies.
- Earn 50,000 bonus points after you spend $4,000 on purchases in the first 3 months from account opening. That's $625 toward travel when you redeem through Chase Ultimate Rewards®
- Chase Sapphire Preferred® named a 'Best Travel Credit Card' by MONEY® Magazine, 2016-2017
- 2X points on travel and dining at restaurants worldwide & 1 point per dollar spent on all other purchases.
- No foreign transaction fees
- 1:1 point transfer to leading airline and hotel loyalty programs
- Get 25% more value when you redeem for airfare, hotels, car rentals and cruises through Chase Ultimate Rewards. For example, 50,000 points are worth $625 toward travel
- No blackout dates or travel restrictions - as long as there's a seat on the flight, you can book it through Chase Ultimate Rewards