We’re really lucky to be in the US where large Sign-Up bonuses on credit cards are very common. One or two well chosen credit cards can get you flights around the US or abroad for a fraction of the cost.
Applying for credit cards is a quicker and easier way to earn miles and points than actually flying in a plane!
But applying for credit cards without knowing what you’re getting into is a recipe for Disaster. Banks don’t exist to dole out miles and points. They exist to make money. Lots of money. And at your expense.
Below are some of the Risks associated with applying for Credit Cards:
1. APPLYING FOR LOTS OF CARDS
It is tempting to think of flying to exotic places and staying in hotel rooms costing hundreds of dollars. So you apply for 6 or more cards at a time to get there.
If you are new to miles and points, you almost always should NEVER start off with lots of cards. A lot of success in this game comes from being detail-oriented and being able to track minimum spending deadlines, payment due dates, and how to interpret complex terms and conditions.
It is much, much better to start slow with perhaps just 1 or 2 cards and see the impact to your credit score for YOURSELF. There is no harm in applying for just 1 or 2 cards at a time.
I’ve been using credit cards for years and I financed my first car – a beat-up Ford Escort using a 0% credit card offer. But I started slow, gauged the impact for myself and then decided to apply for more cards at a time.
Are you able to meet the minimum spending comfortably? Do you avoid the temptation to spend more than you normally would, just to get a sign-on bonus? Do you pay your balance in FULL and on-time?
If the answer to these questions is “no,” you should NOT apply for miles and points credit cards. You’ll save more by going without them.
2. NOT PAYING YOUR BALANCE IN FULL
Miles and points cards charge higher rates of interest than other cards. This game is NOT for you if you can’t pay your credit card balance in full each month. Don’t apply for miles and points cards if you only pay the minimum amount or less than the full balance due.
You will never get ahead in life by constantly paying high rates of interest on credit card debt.
3. SPENDING MORE
It is tempting to spend more than what you normally would just to meet the minimum spending needed for a credit card sign-up bonus. But the miles and points you earn will have a high cost.
Keep a budget and stick to it. Plan out the minimum spending requirements BEFORE you apply for credit cards cards. For example, calculate how much you normally spend in a month and then calculate the minimum spending requirements. Not everyone is comfortable using Amazon Payments or Bluebird, so make sure you can meet the minimum spending requirements comfortably.
If you’re short of the amount needed to meet the minimum spending, it is much better to pay a small fee to pay your rent or loans rather than buy a $200 gadget you don’t need and can’t afford.
4. YOUR CREDIT SCORE MATTERS
A high credit score will save you hundreds of thousands of dollars in interest fees over your life. A low credit score will cost you.
You shouldn’t be playing this game if you have a credit score of ~690 or lower on the FICO scale. Improve your credit score and the offers will still be there for you.
A score of 650 is better than a score of 550, and a score of 750 will get you access to lower interest rates than a score of 650.
But after a score of ~760, you don’t necessarily get a lower interest rate for having a higher credit score. So there is no real need, besides bragging rights, for having an absolutely high score.
For example, if a retired person with a credit score of 830 applies for credit cards and finds her score has dropped to 790, she is no worse off because her credit score still gets access to the lowest interest interest rates. Ramit Sethi of I Will Teach You to be Rich has a similar chart in his post on the importance of a good credit score.
5. BUYING A HOUSE
Buying a home is likely the single largest purchase in your life. And it will bring you far more happiness than applying for a few credit cards. Credit inquiries stay on your credit report for 2 years and lenders will review your credit report when you apply for a house loan.
The forums and blogs are filled with comments from folks who’ve managed to get house loans despite applying for lots of credit cards. Good for them. But I prefer to be more cautious.
I don’t want to risk anything that would either cost me more in interest or not get me approved for a loan. I worry about unpredictable external events which could disrupt credit markets and cause lenders to be extremely selective. So I’d severely limit the number of credit card application in the run-up to a loan.
I can’t tell you a magic number, but it could be reasonable to apply for, say, 2 or 3 cards over the 2 years prior to a loan (though avoid them 1 year before). It probably isn’t reasonable if you have 30 new cards in the 2 years prior!
Credit card sign-up bonuses are among the easiest ways to earn lots of miles and points, but you HAVE to be careful.
Start Slow - Do NOT apply for credit cards if you can’t pay off the entire balance monthly. You’ll likely be paying more in interest than the value of the miles and points.
Don’t spend more than you otherwise would. And don’t apply for credit cards if you will be applying for a big loan in the next 1 to 2 years.