|by Jason Steele|
Earlier this week, I wrote about my friend who is using his credit cards to earn money from his business travel. At the end of the post, I recommended to him that his next step should be using credit cards not just for his daily spending, but to earn large sign up bonuses.
My Friend’s Reaction
Thankfully, he enjoyed the piece I wrote and he appreciated my suggestions regarding his future travels. He wanted me to follow up on the following questions:
Can you comment on getting a card to get the miles (like the 100,000 mile bonus from BA), but then not using it afterwards? Is it worth it to get a card, get the promo miles (using it a little) and then discontinue it’s use/cancel it? What’s the effect on someone’s credit when that’s done repeatedly?
Getting A Card And Not Using It
There is absolutely nothing wrong with obtaining a credit card for a sign up bonus. I suppose someone might make a moral or ethical argument that your acceptance of a generous sign up bonus constitutes some sort of gentleman’s agreement that you will actually use the card. Although I strive to be a very moral and ethical person, I have yet to be convinced that my relationship with a bank is anything other than a standard contract. According to the bank’s terms, there is no reason why I should use their card if I choose not to. If they did need me to use the card in order to justify their sign up bonus, they would condition their offer on my spending a minimum amount. Indeed, with the British Airways card that my friend used as an example, cardholders initially received 50,000 bonus miles, but they were required to spend an additional $2,500 in three months in order to receive the other 50,000 miles. This is also an apt example in that my wife and I continue to use our cards even after we have received the full 100,000 mile bonus. This card offers an outstanding 1.25 miles per dollar spent as opposed to the single mile offered by most airline affiliated cards. Furthermore, we are both striving to earn the award companion certificate that is only received after spending $30,000.
Is it Worth Getting The Miles And Canceling the Card?
I can remember a time where I just felt instinctively that this is too good to be true. It just felt like I was ordering a fine meal and there was no one physically preventing me skipping out on the bill. Eventually, I realized the comparison was more like returning a product after you had received some use from it. Just as stores are willing to take the small risk that they will receive used merchandise, banks are willing to bet their sign up bonuses that you will continue to use the card. While it is rare that I will receive a sign up bonus, never use a card, and then cancel it, I have done so on occasion without guilt or remorse, just as I have returned products to the store that I later decided not to keep.
What’s the effect on someone’s credit when that’s done repeatedly?
Surprisingly, there is little effect on one’s credit from opening a card for the sign up bonus. Remember, the vast majority of your credit score is determined by your payment history and your total debt. In fact, the debt portion of your score is partially determined by your credit utilization ratio. Having more credit cards helps that ratio as being granted more credit lowers the percentage of your balance relative to your available credit. Opening many accounts does not help is you in some ways. One is your average credit history. This is a component of your credit score, albeit a minor one. You can mitigate the impact of opening a new account from time to time by keeping some accounts open over a long time frame. I have several cards that I have kept for years, both because they are good cards and because I extend my average credit history. Another way to ease this negative effect is to keep new cards open for a year as there really is no point in closing them before your annual fee is due. Even then, they may waive the annual fee if you ask. Finally, your credit score can be slightly impacted by opening many new cards in a short period of time. Another small factor in your score is the amount of new credit lines applied for in the last three months and in the last 12. By limiting my applications only to the just a few each year, I can avoid taking a hit on this measure as well. These days, I only sign up for the best offers on the best cards.
Three is no reason not to sign up for a card just for a bonus, as long as you do it the right way.