Rewards cards are almost addicting to those who have them; free sign-up bonuses and discounts on any purchase when you’re shopping? It’s a deal that sounds a bit too good to be true. However, it’s rarely a wise decision to walk into a store, apply for their rewards card and repeat the process at the next four or five stores you visit. This behavior does affect your credit, and not in a positive manner. To help you further and better understand just how negatively it might affect your credit and your financial situation to continue applying for rewards card in quick succession – or not – we have rounded up a few expert tips on the matter so that you can have a well-rounded example of what might happen to your credit score.
No Magic Number
Unfortunately, there is no magic number of rewards cards you can have in your pocket. You can have as many as you’d like. So, if you want to go into Old Navy and get that 15% discount this morning and then do the same thing at Lowes later on, that’s entirely up to you. Though, we would advise that you don’t, it’s still up to you. We get that you want to have all the discounts, particularly this time of year when holiday shopping is what you do more than anything else, but we also have to advise that you carefully think this through. There is no magic number of cards you can or cannot apply for if you want to maintain a high credit rating and keep your account in good standing as far as your outstanding debt. However, there are a few very important factors to consider, and we have those here for you now.
Your Credit Score
When you apply for a rewards card, it might save you some money right now; but it’s not doing your credit score any favors. Applying for one card to save a bundle isn’t going to have any adverse affect on your credit score for long. Sure, you will see a few points drop off your score but it’s very easy to earn those back very quickly as long as you maintain a good credit score and don’t max out any cards without paying them off each month. The more cards you apply for, however, the more your credit score drops.
Another consideration is the age of your credit. Many creditors are looking for new accounts that have a long standing of good credit, and the age of your account shifts when you add a new card to it. How? The average age is no longer as ‘lengthy’ as it was in the past. Many creditors look at that and use it as a determining factor when issuing new credit, loans or cards. Furthermore, it adds new credit limits to your account and makes your available credit higher; this is something that does not always look too good to creditors, either.
The mistake so many people make is not considering that anything past late payments can still have a negative effect on your account. It happens that many consumers believe that their credit is just fine because they never made any late payments or missed any payments. However, a person with very little outstanding debt and two late payments on their credit account might have a higher credit score than someone with tens of thousands of dollars in debt over the course of several maxed out cards and no late payments.
Future Credit Approval
Consumer rewards cards are often run by banks that deal more in lower credit requirements and slightly worse debt than other banks; you could say that they are not as picky as other banks. This is going to become a problem for you when you decide you want a well-known rewards card that you can use anywhere and earn cash back or travel miles. For example, did you know that the more rewards cards you apply for – even if you apply for them over the course of months so that you do not affect your credit so much as you would applying for them all in a week – can result in a denied application for many major credit cards?
Let’s take the Chase Freedom Card for example; this is a cash back card that offers 5% cash back up to %1,500 in purchases on a quarterly rotating basis, and it’s one of the premier cards to have. However, Chase recently announced that they are no longer approving card applications for any consumer with more than 5 credit accounts opened in the past 24 months. Let’s say that Christmas 2013 you applied for both a Kohls and Old Navy rewards credit card to earn the discount while shopping, then did nothing all year until Christmas 2014 when you applied for a Nordstrom rewards credit card and a Victoria’s Secret credit card. Then you did not apply for any other cards until last month when you decided to remodel your bathrooms and kitchen at the Home Depot and you applied for their card so you could get that really nice discount on that really big purchase. Now you have five cards applied for in two years. You carry no outstanding balance, but that doesn’t matter to Chase. Even with excellent credit, you’re not getting their card.
The problem is aggressive card applications; you might want that reward from that store, but is it worth it in the long run? We’ll get into that a bit later in this article.
Here is another factor that many people do not consider when they apply for rewards cards; you might have to meet some spending requirements to actually earn your rewards. Okay, so that Old Navy card we talked about earlier; you get that 15% discount or whatever it is right away on your first purchase. However, when you fly home from your weekend shopping trip in the city with the girls and apply for that airline reward card because you absolutely do want to earn five free flights with all those points you’ll get, you have to spend some money first. Can you afford to spend $3,000 in three months to earn those points? If you cannot, you literally just potentially ruined any future credit card applications for not one thing.
That’s where it makes sense to spread out your applications. For example, 50,000 free miles on your favorite airline for the low price of $3,000 over the course of three months sounds great, and we are not asking you not to apply for that reward. However, we think that you should wait a few months before you apply for the hotel card that’s offering you 5 free nights when you sign up and spend $2,000 over the course of three months if you work with a budget. Can you afford to spend $5,000 in three months to earn all these rewards? It’s a fair question.
How to Make it Work
If you are going to apply for a multitude of rewards cards, we ask that you do it the smart way; and there is a smart way. For one, spread them out. Secondly, only apply for the ones that are actually worth it and beneficial to you in some way in the near future. For example, free miles and flights and almost a week of free nights in your favorite hotel brand so that you can take that otherwise very expensive vacation you’ve been eyeing sounds amazing; so we think you should do it. However, we think you should do it by staggering your applications a few months apart and by planning that vacation well in advance.
Let’s talk scenario; if you decide you want to pan your vacation for September 2016 to Hawaii, let’s go ahead and apply for the airline miles now and the hotel card in March. Now you have until June to spend and pay off those balances and still book your trip far enough in advance that there isn’t a big problem with anything in particular. But, how are you going to spend $5,000 on items in the next few months? Wouldn’t it make more sense to just book the trip and not purchase $5,000 worth of items you certainly do not need? Yes, but that’s not what we are doing.
What you are doing is spending that money on your everyday purchases; instead of using cash or debit to pay for everyday expenses such as gas, groceries, your mortgage and your utilities, you are going to pay for those with your credit card each month. This allows you to meet the minimum spending requirements, not waste money on things you might not need or otherwise be able to afford, and it allows you to earn more points with every purchase. Now, you will pay those expenses off at the end of each month when your credit card bill arrives with the cash you would have otherwise used to purchase them throughout the month.
It’s a win-win situation for all involved.
As far as rewards cards are considered in terms of smaller discounts at your favorite shopping locations, we have some advice on that one, too. What we do not recommend is walking into stores such as Kohls and Old Navy and Victoria’s Secret and applying for rewards cards so you can save 15% on your purchase right now, especially since it’s really hard to spend much in those locations. Sure, you might save $15 on a $100 purchase right now, but how does that really help you when you think about the hit that your credit takes?
Instead, wait until you have a big purchase somewhere so that the application and the discount is worth it. Let’s say you want to do what we discussed earlier; remodel your bathrooms and your kitchen, and you have a $20,000 budget to do it. Now you want to go to Lowe’s and make those purchases. If you apply for the Lowe’s card when you begin making your purchases, you will get a 5% discount right away and on all purchases of $299 or more. So even if you don’t spend your $20,000 all at once, you will still get a 5% discount on all your purchases so long as they exceed $299 each time – which is easy to do with a remodel project.
Now you’re getting $20,000 worth of items and 5% off all of that for a grand total of a $1,000 discount. Isn’t that a lot better than a $15 discount at Old Navy (especially since it would take you forever to spend $20,000 there)? The trick is to apply for rewards cards the right way and the conservative way to ensure that you are getting the best value for every dollar that you spend, and to ensure that the hit your credit potentially takes as a result is worth it.
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