Sign up, max out, cancel, repeat: Rewarding, but dangerous to credit?
Weigh the value of the frequent flier miles against the score damage
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Dear Cashing In,
I have a friend who opened a credit card that offered frequent flyer miles if the credit card maximum was reached within the first couple of months. My friend then canceled the credit card after he reached the maximum and received the flyer miles. How would this affect his credit score? -- Lynn
Lynn, most reward credit cards have what is referred to imprecisely as a "sign-up bonus." Usually nowadays, you don't get the reward miles or points when you sign up, but after you meet a certain level of spending on the card in the first few months.
The idea is to get the cardholder accustomed to using the card, while ensuring that the bank is able to make some money off the card in the form of interchange fees.
So it's not charging the maximum on the card -- which implies going right up to the card's credit limit -- but rather hitting predetermined spending levels before a cache of miles or points is transferred to your friend's account.
This can be an easy way to earn miles. For instance, you can earn 30,000 frequent flier miles on United Airlines or American Airlines by spending $1,000 in three months on the credit cards they offer in conjunction with banks (Chase's United MileagePlus Explorer card, $95 annual fee, waived first year; Citi's Platinum Select AAdvantage World MasterCard, $95 annual fee, waived first year). That's enough for a free round-trip domestic ticket -- assuming you can find an available award seat when you want. Bank-reward cards can have even bigger bonuses.
Receiving these big windfalls of miles or points can be a major reason -- sometimes the only compelling reason -- to apply for a certain card. If you're going to charge $1,000 in three months anyway, wouldn't you rather receive a boatload of frequent-flier miles than not? These deals are even more attractive when banks waive annual fees for the first year, as most do.
The problem, as you suggest, is that acquiring a rewards card, milking it for the points then quickly canceling it can lower your credit score. If you do it once or very rarely, it's probably not that big of a deal, especially if your pay your bills on time and otherwise manage credit responsibly. But I wouldn't advise making it a habit.
Your credit score goes down a few points every time you apply for a card. From there, credit bureaus assess your creditworthiness based on a five credit-scoring factors, including how you manage your payments, how much credit you use relative to what you have available, and your credit history. If you quickly cancel a card, it leaves you with less available credit.
Another danger is that if you cancel your card before you use your points, you could lose the points. This is not true with co-branded airline and hotel cards, but it is true of banks that operate their own rewards programs.
Also, if credit card companies realize that you sign up for cards only for the big bonuses and then cancel, they could decide not to approve you for future cards. They are not required to approve you for credit cards if they deem you an undesirable customer. I've read some reports of people who allege card companies have blacklisted them in this way.
In terms of credit scores, a better approach is to leave the card in place and not use it. If an annual fee is coming due, consider canceling, or asking the bank todowngrade to a no-fee card.
Personally, I would rather cancel a card and accept the small and temporary consequences to my credit score than pay an annual fee for a card that no longer has any value to me. However, though I enjoy the generous sign-up bonuses some cards offer, I'm not willing to risk the potential consequences of quickly opening and closing accounts.
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