It’s often called credit card hopping: applying to multiple credit cards and opening new accounts and sometimes closing old ones — usually, to take advantage of a new cash bonus, rewards points or other offers. It’s a strategy sometimes promoted by personal finance experts and naturally by credit card comparison websites.
And it can be a fine strategy. If you credit card hop without any problems, you may well come out ahead, constantly earning extra cash bonuses, months of zero interest cycles and rewards points that pay for airfare and hotels. It can also, of course, be the dumbest thing a consumer can do, in which you enter a world of exorbitant annual fees and — if you stumble and start missing payments — a universe of late fees, revolving debt and a plummeting credit score. If you’re going to credit card hop and don’t want to end up hopping mad, you’ll want to follow these rules.
[See: 10 Completely Careless Credit Card Mistakes You’re Making.]
Be organized in how you pay the cards back. Ben Luthi is a Provo, Utah-based staff writer for the website StudentLoanHero.com. He says that he currently has 12 credit cards but has cycled through close to 30 over the last couple years.
“To avoid having things blow up in your face, I recommend using a budgeting software that offers direct import [with your credit cards]. This way you can keep track of all your accounts and transactions in one place. You should also keep track of your due dates in a spreadsheet so you can avoid late payments,” Luthi says.
And any personal finance expert will tell you, if you want the perks of having multiple credit cards to benefit you — pay the card back in full every month. Carrying debt from one month to another, unless perhaps you’re in a zero-interest cycle, will wipe out any financial gains you make on extra rewards points and cash bonus offers.
Pay attention to your credit score. If you’re applying for a new credit card every several months or so to chase rewards points and cash bonuses, be sure to occasionally monitor how that’s affecting your credit score — and be careful about opening new accounts if you’re planning on making a big purchase soon, warns Kristin McGrath, an Austin, Texas-based editor for the website CreditCardForum.com.
“Opening new cards dings your credit score a bit and can make you look credit-hungry,” she says. “So, if you’re on the cusp of getting a major loan, like a car loan or mortgage, this isn’t a game you want to play.”
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Learn everything you can about each credit card. Yes, the perks and rewards points are important, but don’t forget to read up on everything as well. Maybe once you get familiar with a card, you’ll realize you aren’t thrilled with its high annual percentage rate (which won’t matter if you pay everything off every month, but which will if you don’t). You may not like the grace period — that is, the time you have to pay off a new balance from the moment you receive your bill until you receive finance charges.
“It’s all about reading the fine print,” says Matt Freedman, head of credit card products at Navy Federal Credit Union, headquartered in Vienna, Virginia.
Freedman suggests carrying one or two credit cards that fit your lifestyle, but he concedes, “If you’re a very responsible spender, it can be beneficial to have multiple cards. For example, if you eat out often but use a certain airline regularly, have one card that rewards you for restaurant purchases, and another card that enhances your travel rewards on that specific airline. As long as you’re paying your monthly balance, you won’t fall into debt.”
But pay close attention to the fees, especially the annual fees, McGrath cautions.
“A lot of the most coveted rewards cards have annual fees. If you’re paying a $450 annual fee on one card, $95 annual fees on two more and a $49 annual fee on another, you really need to make sure you’re earning those fees back by using the cards’ perks and rewards structures to your advantage,” she says. “If you aren’t organized, don’t have enough spending to go around or simply get overwhelmed by all the programs’ fine print, you could end up paying more in annual fees than you get back in rewards and perks.”
[See: 9 Financial Tools You Should Be Using.]
Be careful about closing accounts. You’ve likely heard that if you close a credit card account, your credit score will drop a little. The same thing happens, though, if you open a credit card account.
All of this means that it isn’t a tragic error on your part if you do close an account, and it may be smart, even if your credit score is slightly knocked around. You simply might not want to keep track of 15 credit cards.
Still, you also don’t necessarily want to automatically close one credit card every time you open a new one. For starters, lenders like to see that there’s a lot of credit that you aren’t using. It’s known as the credit utilization ratio — the amount of credit you’re using versus how much credit you have. Typically, lenders like to see that you’re using less than 30 percent of the credit available to you. So closing a card could potentially upset that credit utilization ratio and damage your credit.
That said, many credit cards have hefty annual fees, Luthi points out, and if you aren’t using a card, and it has a fee of $450, you’re wasting $450 every year. It’s worth pointing out that if you stop using a credit card and have several accounts you never use, the decision to close the account may be done for you. Some credit companies will close down an unused account, typically after a year, and so you may end up losing the card eventually, anyway.
Use common sense. If you’re living paycheck to paycheck and always find it something of an adventure to get bills paid on time, credit card hopping is a lousy idea. But if you consider yourself extremely organized, and you make a healthy income and aren’t likely to max out one of your credit cards and fall behind on the debt, then this may work out beautifully. Still, you never really know.
“There are people out there with more than 50 cards who manage them all impeccably with a spreadsheet and have FICO scores above 800,” McGrath says. “And there are people who have just one card, get another for a zero percent balance transfer deal, and then double their debt and sabotage their credit practically overnight.”
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5 Rules to Follow When Credit Card Hopping originally appeared on usnews.com
