Canceling a rewards card after using the bonus can save money on the annual fee but also affect your credit
Dear Cashing In,
About a year ago, I read that a good strategy was to sign up for travel reward cards that have large sign-up bonuses and then cancel these cards once you have used your points and before the annual fee kicks in. That seems to be smart, since cards give between $400 and $625 in rewards. Then some credit cards require a full 24 months after cancellation to be eligible for the sign-up bonus again. You can alternate cards year after year to offset vacation costs tremendously. Too good to be true? – David
To a lot of people who are just now discovering rewards cards, sometimes the deals can seem too good to be true.
Then, you receive anywhere between, say, 30,000 and 50,000 points, which you can redeem for a few hundred dollars’ worth of travel.
Just cancel the card before the annual fee comes due, and you’re way ahead – right? You’ve received a lot of valuable points, and your only expense is the spending on the card, which you probably were going to spend anyway. Pretty good deal.
The truth is that rewards cards really can be a good deal, if you manage them well. There are potential downsides, but if you are aware of the pitfalls, you can steer around them and reap several hundred dollars’ worth of rewards for essentially nothing.
Here are several potential problems with using reward cards this way:
- Credit score. A lot of people worry about their credit. They fear that rapidly opening then closing accounts will drive down their credit scores, which will make it more difficult or expensive in the future to open cards or buy homes, cars and other things on credit.
There are many factors that make up credit scores, such as how much of your available credit you use (credit utilization), how long you have accounts open (length of credit history), and how many recent credit inquiries you have. It is true that your credit score could dip from repeatedly opening and closing accounts, but that decline is likely to be small and temporary if you otherwise manage credit well. That means paying on time and in full.
It probably also makes sense not to go too crazy with opening many rewards cards all at once, and you might want to have a card you hold onto long-term.
- Fees and interest: If you pay late – even by just a day – you will get hit with steep late-payment fees and interest charges. If you don’t pay your bill in full, you will pay interest charges. Fees and interest can greatly cut into your rewards, so applying for rewards cards does not make sense if you tend to carry a balance. You’d be better off finding a card with a low interest rate, paying off the card, then hunting for rewards cards.
- Juggling multiple accounts: Having too many cards open at once can be a logistical headache, since you need to keep track of when the bills are due, how much you need to spend on each card, when to close them and so on. If you are not organized, then having multiple cards might not be for you.
- Shut out from future possibilities: Another potential downside to applying repeatedly for rewards cards is that future opportunities for cards might close. Card issuers have been cracking down and limiting, for instance, the number of times you can apply for a card and receive its sign-up bonus. American Express made that change in 2014. Similarly, Chase has rejected credit card applications from people who have applied for too many cards in the past two years.
Assuming you follow a modest and sensible approach to applying for cards, though, you should be just fine.