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Pitfalls of pumping, dumping sign-up bonus cards

Summary

The “pump and dump” strategy of taking advantage of huge bonus sign-up reward points or miles can really mess with your credit if you’re not smart.

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Dear Cashing In,

If you get the most rewards point advantages in bonus sign-up offers when you first open an account (like the first six months), then what do you suggest I do after that time period ends? Close that account after I cash in my rewards? I don’t have one particular airline or hotel that I use a lot, so I wonder what my best strategy should be. Should I be a “serial monogamist” and use one card heavily, then cash out the rewards and dump the card every couple years to rack up the sign-up bonuses? Or is there an advantage to being loyal to a single card for a long time? — Merlin

Dear Merlin,
There’s no doubt about it — there are some great sign-up bonuses out there right now. While rewards program cardholders used to be very loyal, there is a trend among the mileage-savvy toward forgetting about loyalty and focusing on accumulating as many miles or points possible. This trend can be attributed to the changing credit card landscape and to an increased awareness of the richness of sign-up bonuses.

That said, there is ample proof from dozens, if not hundreds, of cardholders I know that the “pump and dump” strategy can work without doing much harm to your credit rating if you’re careful — although these days it does help to start out with a great FICO score — the most commonly used measure of an individual’s credit record.

Why do you need a great credit score?

  • If you don’t have one, you probably won’t qualify for the best offers out there, which are — now more than ever — reserved for those with great credit.
  • Every time you open a new line of credit, your credit score takes a slight hit, so your score needs to be high enough to absorb that hit without impacting your ability to get credit. But even if your score is high, you don’t want to apply for several credit cards all at once. Do it slowly and deliberately or your score could really suffer.

Also, part of your credit score is dependent upon how long you’ve had credit. Unless its terms become awful, keep the card you’ve had the longest and use it from time to time to keep it active. If you’re going to cancel a credit card, cancel the most recently opened account, and don’t close multiple accounts at once.

Plus, the bonus offer is the same whether you are given a $2,500 credit limit or a $40,000 credit limit. Because of this, the idea of “pump and dump” seems to appeal to those who are merely trying to build a base of miles and points independent of spending to increase rewards. Remember, cardholders with great credit ratings are those who pay off their balances in full every month, so your credit limit isn’t that important (unless you plan on making some rather huge purchases)

The “pump and dump” strategy, however, can be fraught with pitfalls. You have to be disciplined in managing your accounts and cancellations. You also have to be  knowledgeable about the offers you get and how you are going to piece them together over time to make sure you have the miles and points balances that can actually create travel wealth for you.

I know a cardholder who tried to employ this strategy and after two years, he wanted to know how best to manage his miles as he ended up with airline miles in five different loyalty programs. While that’s nice, none of the accounts had enough for redemption purposes, and the consolidation process from program to program took away much of his mileage value.

While it is possible to use the “pump and dump” strategy with different cards participating with the same providers, I’ve heard that credit card partners are asking rewards programs to create rules to detect and prevent this type of activity. It hasn’t happened yet, though, and when you consider the vast number of loyalty cards that partner with providers across many programs, it will probably be a difficult matrix to manage once fully implemented.

My advice would be that when you come across what appears to be an unbelievably generous sign-up bonus rewards program, read the fine print carefully. While I would never advise you to stick with the same old program and credit card year after year, I do encourage cardholders to audit their cards every year or even every six months. That way, you can compare what you have against the new offers.

As a result of doing my own rewards program audits, I have changed cards to take advantage of a great sign-up bonus program. But making that decision based on sound reasoning rather than being impulsive made me feel better.

The bottom line is that loyalty programs are very competitive, but you have to be smart about how you manage points or miles in multiple reward credit card programs. That means doing some research and putting some thought into your decision before you leap.

Hope this helps, thanks again for the question.

See related:  Compare all rewards credit card, Compare frequent flier credit cards, Credit card users beware: Terms, they are a-changing, How to decide when to dump your rewards card for another, Comparing value of cash back cards vs. rewards, How to cancel a credit card

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