Should I apply for new card just to get the bonus?
Erica Sandberg is a prominent personal finance authority and author of “Expecting Money: The Essential Financial Plan for New and Growing Families.” She writes “Opening Credits,” a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.
Will my credit score suffer if I apply for a new card to get the bonus and then cancel it once the annual fee kicks in?
Pursuing a new card and then canceling it will cause your credit scores to fluctuate, but if your scores are high and you manage the card well by paying the balance off entirely and on time, the damage should be minimal.
Dear Opening Credits,
I received a very good offer from a credit card company that offers a good amount of cash rewards for opening a new credit card account. I already have a card I use regularly and don't need another one. However, I would like to take advantage of the promotional offer.
So, if I open the account, receive the promotion and, at some point, close the account (as it has a yearly fee), would that have a considerable impact on my credit score? I have a very high score now with low balances and established credit. – Dave
As you likely know, high credit scores rarely happen by accident! Everything you do with credit cards, from applying to closing them, impacts your credit rating. That’s because all that activity is listed on your credit reports and is factored into your credit scores.
Therefore, pursuing this card and then canceling it will cause the numbers to fluctuate. A hard inquiry would be placed on your reports soon after you applied, which would shave a few points from your scores.
Since you have a considerable attractive data being listed on your credit reports with the card you currently use, the decline would be minor and brief.
Assuming you are granted the credit line and use it responsibly, your numbers will probably escalate, since multiple accounts that are properly managed help scores rise. Also, if you are currently carrying a balance on your current card, it would expand your credit utilization ratio, and that, too, could result in a higher credit score.
How closing the card will impact scores
But if you close the card after a few months or a year? As long as you have no or very low card debt, the loss of that new credit line shouldn't affect your score too much if your balances are zero.
Applying for the account, however, shortens your average of accounts, which comprises 15 percent of your overall credit score.
Canceling the card won't undo that. However, the positive history of the new account will remain on your reports for a total of 10 years after the account is canceled.
Credit cards with substantial sign-on bonuses are super attractive. They often come with points or cash incentives if you charge a certain amount within the initial first months, so you can profit from the arrangement.
The card you’re interested in has an annual fee, but many cards waive that annual fee the first year, giving you a free ride for a year..
To know if the card makes sense for you, take a dive into your spending habits. Write out what goes into your normal budget, and make a notation next to each of the expenses you can charge and repay to see if you can meet the credit card’s minimum spend.
Take advantage of that high score
If a plan like this sounds doable, fantastic. Put your current card on ice for a while and concentrate on using the rewards card.
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Be sure to pay all bills on time and in full, as added interest will erode the value of your rewards.
After that, you have a decision to make. You can keep the card active and continue to charge your way to more cash back or points, or cancel it and revert to your original card.
If you choose the former option, you’ll have two accounts at your disposal, which many people find handy, but I’m a firm believer in only having the cards you truly want.
You’ve built a high credit score with the single account before and you can do it again. Try not to worry so much over a short-term digit drop.
Remember, the path to a high credit rating is simple: just borrow money regularly, never miss a due date and maintain extremely low balances.
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