The danger of playing the credit card rewards game
If you've got good credit, companies will offer you incentives to use their cards. Is there a risk, and are the rewards worth it?
One of the perks of having high credit scores is you'll get lower interest rates on things like car loans, mortgages and credit cards. And in the case of credit cards, many issuers who are after your business offer generous "sign-up bonuses," leading some people to chase the big rewards.
In some cases, they'll apply for a card that has an annual fee that is waived the first year, cancel the card and then go for a competitor's big sign-up bonus. The rewards can be tempting (especially from some of the best cash-back credit cards in America).
But most of us know that rewards often come with an unwelcome companion: risk. Is it risky to try to claim these bonus rewards? In general, you have to have very good credit in the first place to qualify for the cards that offer the big rewards. So is there a risk in taking the incentives card issuers are offering?
There can be, says credit card expert Barry Paperno, who cautions, "It should also be understood that the scoring risk from churning is more likely to be a lower score -- all other things being equal -- than you would otherwise have without the continual flow of new and closed accounts on your credit reports."
Before you apply, it's a good idea to find out if you can afford to lose a few points on your credit scores. If your score isn't in "very good" or better territory, churning is almost certainly not a good idea for you.
Paperno is not saying that churning is a bad idea, but he is saying that it's not for everybody. If you're considering it, it's just as important to take a hard a look in the mirror as it is to understand exactly what you have to do to qualify for those enticing incentives. Because the only people who should even attempt such a strategy are those "who can not only make their payments on time, but also pay their balances off each month without incurring finance charges, since, after all, the purpose of churning is to save money," he said.
If that's you, and your credit score is high enough so that a bit of a drop will still leave your credit at "very good" or better and you don't plan to apply for any other big loans in the near future, go ahead. If that's not you, then chasing the sign-up bonuses could end up costing you in the long term -- rewards cards tend to charge higher interest, and if you forget to cancel, you may pay a hefty annual fee that could easily top $100 for premier cards.
As if losing money on the deal weren't bad enough, chasing bonuses could potentially hurt your credit in two scoring categories: length of credit history and new accounts (history of searching for credit).
Length of credit history makes up about 15 percent of your credit score, so a strong payment history (35 percent of your score) and low credit utilization (30 percent) can help counter the shorter credit history that will result from new cards.
Your history of searching for credit makes up about 10 percent of your score. Just opening a new account (or applying for one) causes a small, temporary drop in your credit scores, Paperno said, "It is also helpful to keep in mind that while 'good' scores are indeed possible for a credit report containing multiple recently opened accounts, to get a 'very good' score (750+) you should not have more than an occasional recently opened account."
Some people are able to collect big rewards and maintain good credit while churning -- but it's important to understand the rules and to be aware of your own habits before you get in the game.
More from Credit.com
- Should I close a credit card account?
- What's credit card churning?
- How to lower your credit card interest rates
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My wife and I churn several cards every year and we still manage to keep our credit scores above 750. Our house is paid for and we purchase cars with cash so we don't really need a good credit score but in order to keep getting the good bonuses you need to keep your score above 750. I would not recommend the churning game to anybody who will have the need to secure financing for an important item in the near future.
But how many CITI BANK depositors ended up paying to put money in CITI BANK hands. And CITI BANK benefited from the inflated imaginary cost of airline points as a loss.
I withdrew my monies from this bank robbing company and have not put a dime in since.
this is called enslavement by the bankers. the best way to become freer is not to borrow money!
the bankers are con artists of the first class and it is up to you not to fall into their trap.
Well this post is typical of the BS we see in today's World. I was all for this post until I read the high and Mighty, holier then Everyone else part. AMann really have no idea why a Given Person might have a low or Zero Credit Scores. Some folks just pay everything in CASH. This constant Stupidity by some posters to only see the Fraud when it applies to them and not anyone else, that's what's dumbing down this Country to levels not seen since the Stone Age.
Fact is, if Bogus Credit Agencies were Sued by a National Class Action Lawsuit for any and all False Information on a Report that break current Law, a ton of BS by them would stop, basically Immediately. I have very little care nor concern for a poster that thinks somehow they are cream of the Crop and everyone else is Chopped Liver. The poster really has not clue to what anyone else has gone through in life nor why.
Bogus Credit Scores are being used to charge folks more for Insurance rates, to justify Usury rates on Loans, and to even deny folks gainful employment. Folks better get a clue real Fast to the BS which is Credit Scores. A National Class Lawsuit against them would be a great start. If would make them think twice about having false and misleading information on anyone's report.
First, WHO is foolish enough to pay an annual fee ANY year?
Second, keep frequent track of both your total spending and your credit card balance (a former credit card thief recommends Intuit's free mint.com to keep track of several things at once. See: http://finance.yahoo.com/news/pf_article_111759.html). Keeping a budget and frequent checking can replace the braking effect of taking cash out of your wallet.
I save a couple hundred each year with cash-back credit cards.
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