Is it ok to apply for credit cards just to get the signup bonus? Will it hurt my credit score? Does it really save you money?
Yes. No. Yes. Well that was easy!
Ok ok, let me answer these in a little more detail.
But first, why should you even listen to me?
I appreciate that I’m just a stranger on the internet so let me qualify my opinion a little bit. I’m a CPA by trade with a penchant for personal finance – a topic that I am very passionate about (I have a blog about it after all). More importantly I’m a points and miles practitioner; I overcame my extreme skepticism through research and experience and have used credit card strategies to fly and stay for free numerous times over the past two years. All-the-while I’ve closely monitored my credit, convinced my wary wife, and had a ton of fun travelling and points scheming along the way.
Qualifier: Before we dig in, DO NOT DO THIS if any of the following apply to you:
- You carry a balance on your credit cards. If you are unable to pay off your credit cards every single month this game is not for you. You need to get your finances in order before you start worrying about points and miles. No signup bonus is worth paying those horrendous interest rates. Also if you’re in credit card debt you should not be vacationing! Pay that off you clown what is you thinking!?
- There is no #2. Just don’t freaking do this if you are in credit card debt. I really want to get that point across and unsubstantiated market research shows bullet point lists make people pay attention.
Is it ok to apply for credit cards just to get the signup bonuses?
Yes absolutely! Credit card companies partner with the travel industry to entice you to sign up for their card by offering huge bonuses with the partner. I’ll go into this arrangement in detail in a future post, but for now let’s stay on task. The deal is that you must meet a minimum spending requirement (usually $3,000 within 3 months) and then they give you a bushel of points.
There is certainly nothing illegal about signing up for credit cards in this way. There are no laws governing motives on credit card signups, you can have 100 if it tickles your fancy.
I don’t see any ethical problems with signing up for credit cards just for the bonus. Credit card issuers have done their due diligence on promotional and marketing strategies to know what works to attract customers. They put these offers out there in hopes of luring customers into lifelong spending relationships (I’ll talk more about how credit card companies and the offering banks make money in a future post).
Getting a credit card just for the signup bonus is akin to buying something on clearance at Target. When Target introduces a new nightstand in their stores they sell a few at full price, then some at a discount, and finally a few go out on clearance. It’s a natural product lifecycle and the clearance buyers are savvy, not amoral.
Similarly, credit card issuers are also going to make different amounts of money from different customers on the same product. On some of those customers (like us points and miles gamers) they may lose money, but it’s worth it to them to lose on a few in order to win big on others. That’s why Target decided to sell that night stand even though they knew they’d eventually sell some at a loss on clearance. We’re the clearance shoppers, and it feels good.
Will it hurt my credit score?
No. Make sure you check out my detailed post on how your credit score is calculated, but for now let’s go over the basics. There are 5 factors affecting your credit score: on-time payments, credit utilization, credit history, credit inquiries, and open accounts. Two of these are waaaaayyyyy more important than the others, on-time payments and credit utilization.
According to Credit Sesame these two factors account for 65% of your score! It makes sense that on-time payments are #1. Credit card companies are businesses; they want to give you the maximum credit they think you’ll be able to pay back. A history of paying other credit card companies what they’re owed is a pretty good indicator you’ll pay your new one.
As long as you continue to pay off the balance of all your credit cards on-time every month, opening new credit cards will not hurt the biggest factor of your score.
This just means how much of your available credit you’re using at a specific time. It’s a snapshot of how much you owe on your credit cards compared to how much credit you have available.
It’s easiest to explain in an example: if you have 2 credit cards each with a $1,000 limit, your total credit available is $2,000. If you go out and buy a $200 Target night stand, the amount you owe on your credit card is $200, even if it’s not actually due until next month, it counts as soon as you swipe. If the snapshot of your credit is taken after you buy the night stand and before you pay it off, then your credit utilization is 10% ($200/$2,000).
Opening new credit cards will actually help this factor of your score. It’s crazy, I know. Having more credit cards will increase the total credit available to you – the denominator in the utilization equation.
Altering our example from above, if you have 10 cards with a $1,000 limit instead of 2, your credit utilization becomes 2% ($200/$10,000). A lower credit utilization rate will improve your credit score; when I first started the points game my credit score went up!
My Personal Credit Score
Here’s a screenshot of my credit score as of October 11, 2017.
Pretty great! And this is despite having opened 11 credit cards in the last two years! You’ll see from the “MY DEBT ANALYSIS” section that I’m doing a great job on my credit utilization – my balance was only $10 when they took the snapshot.
The D grade is for a category called “credit mix”. It’s bad because I only have one type of credit available (credit cards) as opposed to having a home loan, auto loan, student loans, etc. How backwards is this score – I’m getting docked for not having debt! The good news is this category basically counts for nothing, which goes to my point, on-time payments and credit utilization are what matter.
Tracking your Credit Score
Time for my first attempt at an advertising plug! I use Credit Sesame to keep tabs on my credit score. I check it maybe once a month just to make sure there are no surprises. The visuals are great, they don’t bombard me with ads, and it is totally 100% free.
You can sign up here for Credit Sesame. If you do I may get a small commission, but it will be free for you 🙂
Does it really save you money?
Yes! First a disclaimer: your travel will never be completely free. You still have to pay all the tertiary costs like airline taxes, airport and hotel parking, ubers, food, yada… But for the majority of people the prohibitive costs of travel are the big ticket items – flight and hotel – and those you will definitely save money on.
You will have to pay some annual fees, but those are more than offset by the travel savings. We’ve been playing the game for two years now and have tracked all our redemptions- how much they cost in points and how much they would have cost in $. I also keep track of how much we spend on annual fees and other points scheming costs (e.g. making a paid stay just to earn a future free night during a hotel promotion).
In the past two years we’ve:
- Opened 17 credit cards solely for the signup bonuses
- Gone on 36 trips!
- Redeemed points and miles for $32,413 in free flights and hotels
- Spent $2,209 on the points game, bringing our net benefit to $30,204
If this seems implausible you’ll have to check out my reckoning of our 2016 expenses when we spent $21,498 on travel (eesh). We travel a lot.
Of our $30,000 in points and miles winnings we had a single benefit that far and away led the money saving pack. But that will have to wait for a future post 🙂