Travel card sign-up bonuses can range from 25,000 to 100,000 miles, and, to remain competitive, cards have been raising the stakes even more lately. Get a bunch of those giant bonuses, and you’re flying free around the world.
That’s why plenty of rewards enthusiasts chase sign-up bonuses as a hobby. But this strategy isn’t for everyone, and would-be rewards chasers need to know the financial and credit consequences.
In addition to hurting your credit score, signing up for too many cards can sabotage your chances of getting a great card in the future. Chase, for example, has its “5/24 rule,” which blocks you from getting a new Chase card if you’ve opened more than five credit accounts (from any bank) in the past two years.
“I understand the desire to chase sign-up bonuses,” says credit expert Linda Ferrari. “Every time I log in to my airline accounts, there’s another amazing offer of how I will get 40,000 bonus miles by opening a new card and spending $3,000. … The only advice I have is that consumers become more aware of the impact the process of opening multiple accounts in a short period of time can have on their credit worthiness and scores.”
Still want to pursue sign-up bonuses? It’s a delicate balancing act between choosing the best offers and creating the stable credit history that makes new approvals possible. Here’s how to avoid getting burned.
Why opening lots of new cards can hurt your credit
The immediate effect of numerous credit applications are the numerous hard inquiries (or “pulls”) that appear on your credit reports when lenders check your credit. Those inquiries are a “red flag” to lenders looking at your reports, Ferrari says, because they suggest you’re desperate for credit. They’ll temporarily ding your credit scores, too.
“How many [points you’ll lose] depends on where your credit is at the time,” Ferrari says. “The higher your credit scores, the less points you will lose for a hard inquiry. The average is five to 10 points each inquiry.”
Hard inquiries fall off your reports within two years. FICO factors them into your score for just six months. But rewards addicts often have a constant stream of new applications, and those will “clutter up” your credit reports with inquiries, says Ferrari.
“The highest credit scores I see are on reports that have very little clutter,” Ferrari says.
Another potential credit consequence is tied to the spending requirements — the amount you must spend in the first few months of card membership to get the bonus. If your credit limit is low compared to the amount you’re required to spend, you might come close to your credit ceiling, another factor that can drop scores.
“In order to get the rewards, you have to spend, right?” Ferrari says. “How we use and manage our credit cards makes up 30 percent of our credit scores, and all it takes is one maxed-out credit card to drop a score by 75 points. Imagine what three to five maxed-out cards will do.”
Playing it safe
It’s possible to chase rewards responsibly, those with experience say. But you need to take your circumstances and financial goals into account every step of the way.
1. Start small
“It’s good to get practice before you join the big leagues,” says Scott Mackenzie, owner of travel rewards site Hack My Trip.
Some seasoned bonus chasers may apply for as many as five or six cards in one go. Mackenzie recommends starting with two or three.
That lets you test your endurance for meeting all the cards’ spending requirements (which can be daunting) and tracking all their balances and due dates. You’ll also avoid getting into a lot of credit trouble right off the bat. If you’re rejected (perhaps because of credit report errors you weren’t aware of), at least you end up with just a couple wasted hard pulls instead of half a dozen. Plus, some banks ask on their applications if you’ve been denied credit with them before. Checking the ‘Yes’ box won’t automatically doom future applications, “but it would be great if you could just say ‘no’ to that question and say you’ve always been approved,” Mackenzie says.
2. Batch your applications
After your trial run, separate future applications into batches of several cards, says Ariana Arghandewal, founder of rewards travel site PointChaser.
“You’ll apply for maybe four cards at the same time from four different banks,” she says. “And you want to get [those applications] in at once. After 90 days, you can apply for four other cards.”
The advantage of simultaneous applications is that banks get spooked if they see fresh inquiries. Applying for several cards at once, in theory, ensures that banks won’t see the other cards you just applied for because it takes time for inquiries to show up on your credit reports.
“But I’ve heard other people say banks are smarter than that, that they see real-time updates in their system,” Mackenzie says.
Still, there’s another advantage to synchronized applications that has nothing to do with approvals:
“If all those inquiries are on the same day, they’ll drop off your reports at the same time,” Arghandewal says.
3. Be choosey
You don’t want to waste a credit pull on a sub-par bonus offer. Plus, not all cards will allow you to apply for a new, better sign-up offer if you’ve already been approved for a ho-hum offer on the same card. So, it pays to know when to pounce — and that comes from experience. You have to know that a card usually offers just 25,000 miles or points to know that an offer of 50,000 is worthwhile.
“That’s a strategy for a lot of things, whether it’s a credit card or buying a plane ticket,” Mackenzie says. “You need to always be searching around so you know whether an offer is a regular one or a good one.”
4. Respect the minimum spend
New cards obtained in quick succession means contending with multiple spending requirements standing in the way of your sign-up bonuses.
“If you don’t meet the minimum-spend requirements, you’ve got these hits on your credit, and you don’t get the miles,” Mackenzie says.
Spending requirements might be chump change to those with high incomes or who can funnel work expenses through a card. Others can reach them, too, if they time their applications wisely. Mackenzie once timed a $10,000 spending requirement with a large tax bill and knocked out a couple more with wedding expenses last year.
Whatever you do, don’t use a sign-up bonus as an excuse to spend more than you otherwise would.
“If you’re a person who can’t handle a $10,000 spending requirement, and you’re not familiar with ways you can achieve that, don’t take that on,” Arghandewal says. “A lot of people go off and spend more than they need to.”
5. Get new cards, but keep the old
A long credit history strengthens FICO scores. So how do you maintain that with high card turnover? Have a core group of cards that you never close, Mackenzie and Arghandewal say.
Among their keepers are cards that offer travel benefits or anniversary gifts (like free hotel nights or companion fares) that offset the annual fee.
“If I can make it worth my while, I’ll keep a card if it pays for itself,” Arghandewal says.
Arghandewal also points out that American Express (a CreditCardForum advertising partner) will backdate your cards to your oldest account. So a brand-new card will register as a five-year-old account, if your oldest AmEx happens to be five years old. This unique policy can boost your average age of accounts and help stabilize your credit profile.
Mackenzie suggests using your keeper cards as a solid credit foundation.
“If there are four cards you want to keep, apply for those in your first year,” he says.
6. Don’t carry a balance — ever
If there’s one cardinal rule that grounds you while you’re off chasing bonuses, make it this one. Carrying a balance and accumulating interest charges will cancel out any rewards you earn.
“These cards have annual fees, they have high interest rates,” Mackenzie says. “They make their money somewhere. You don’t want to be the schmuck who’s paying for someone else’s rewards.”
7. Maintain a hands-on approach
Keep a watchful eye on all your accounts. You don’t want late payments marring your credit. Plus, you’ll want to keep your credit utilization in check, as high utilization weighs down credit scores. Even if you pay in full each month, a high credit utilization can still get reported to the bureaus because banks often report your balance the day your statement cuts – not the day you pay.
“Pay your balances off before the statement date so the balance that gets reported to the credit bureau every month is under 30 percent,” Ferrari suggests. “That way you will mitigate some of the point loss due to the new hard inquiries and credit.”
Arghandewal uses that strategy, making a payment on her cards every two weeks.
8. Don’t compromise bigger financial goals
Got plans for major loan applications? Scrub your accounts of anything that will give a lender pause.
“Manage your balance-to-limit ratios based on where you are in your life and when you plan to use your credit,” Ferrari says. “If you plan on purchasing a home or car, you will need to pay down your new credit card balances to under 30 percent, two or three months before you apply.”
And cool it on the card applications
“If you’re planning to apply for a loan in the near future, you don’t want to be applying for cards right before that,” Arghandewal says. “You don’t want to take that hit on your credit. It will affect your interest rate, and that’s not worth the rewards you’ll be getting.”