Warning: The 5 Dangers of Applying for Credit Cards

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We’re very lucky to be in the US where large sign-up bonuses on credit cards are common.  One or two well chosen credit cards can get you flights around the US or abroad for a fraction of the retail cost.

Applying for credit cards is a quicker and easier way to earn miles and points than actually flying in a plane!

The 5 dangers of Applying For Credit Cards

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. 

5 Dangers of Credit Cards

Are You Better Off Cutting Up Your 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!

 Bottom Line

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.

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These responses are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser's responsibility to ensure all posts and/or questions are answered.

72 Responses to Warning: The 5 Dangers of Applying for Credit Cards

  1. Another one I think worth mentioning though probably not on the level of the above is bait and switch offers, namely from Barclays and some Bank of America (FIA Card Services).

  2. Good post. These warnings aren’t discussed frequently enough.

  3. Also Barclay has been known for initially approving and months later closing down accounts if they saw you get additional cards around the same time. This happened with the US Air card for us.

  4. I think people way overdo it worrying about their credit score before applying for a mortgage. For instance if your score goes from 810 to 760, it’s likely not going to affect you at all. Some people have their score go up by applying for multiple cards. If you are doing this right, you are making thousands of dollars off of your credit score. The worry of your mortgage rate being 1/8 of a percentage higher shouldn’t keep you up at night.
    I’ve refinanced twice despite getting dozens of cards. During my last refinance my low credit score in the 730s cost me literally $6 more than the best rate. How stupid would I have been if that $6 kept me from earning thousands?

  5. Many times credit score impact is based on thresholds rather than exact score. So there may be no effective difference between 750 and 730. It may be prime rate for everyone over 720. Might be something worthy of a future post.

  6. I agree with David’s comments. My wife and I were actively churning cards (3+ each per cycle) when a work opportunity came up that required relocation. We stopped cold turkey and waited 4 months to allow our credit to recover a bit. Thankfully both our scores were above 750 and though we were questioned on it, all three mortgage brokers that we worked with were willing to write the business.

  7. What about car loans? Is there a threshold that you recommend Daraius in the run-up to a car purchase?

  8. Darius,
    Might not be the correct place to post, but just a recent data point for Chase cards. I just applied for the Chase Hyatt Card (Unpublished link, also status matched to Diamond from Hilton, to get two nights in a suite) , and was automatically approved. Then immediately (same day) applied for the Chase United card (unpublished 55k link), received the pending decision. Called reconsideration line, offered to move my entire CL of my CSP (annual fee was due), to the united card, put on hold, two minutes later, approved. Two personal chase

    Been reading your blog for a year now, blown away by all I have learned in 12 months. Over 1.5 million points, a slew of random free hotel night certificates, know how to use CL’s to my advantage, know how to apply for all types of cards, etc. Thanks for the blog!

  9. @David

    I think not every lender looks only the score. Nowadays many of the lenders goes through the report in detail and can see you applying for so much credit in the last few months. I know they also go through your bank statements to check the cash flow. So its always safe to be quiet before the biggest purchase of your life.

  10. How are “start slow” and “pay your balance in full” dangers?

  11. For any real estate investors, do you know how CC churning affects purchasing more real estate? I have applied and been approved for 4 cards recently. I’m looking to purchase a rental in April.

  12. weevinweaver

    I LOVE CREDIT CARDS! Getting lots of points makes me so happy inside. I agree with Darius though, some people take it to the extreme. I guess I am just kind of worried that one day the CC companies will just stop giving away offers because they are abused so much. One example of taking it to the extreme was the Million Mile Madness. Yes I think it is pretty cool, but now everyone is going to think I can do it too.

  13. My FICO’s were a little over 800 in June 2012. I refinanced 3 of my rental houses to much lower prime interest rates. For rental houses, the lenders are VERY strict!! (much more than your home that you live in!!). In my case, I got approved for prime (lowest) interest rates because of many positve factors:

    1. 20 years with same employer.
    2. Over 800 FICO’s. (804 mid bureau score). I only needed 740 but having 800+ FICO made the approvals (3 refi’s!) very easy
    3. Decent income with 28 yr job history in my field (chemistry–chemist)
    4. Modest CC applications in previous year. I just to explain to the lender why I wanted the CC’s. (one going back the previous year, more 1-2 yrs back)
    5. I paid off our car loan the year before. No debts other than rental mortgages which had positive cash flow.
    6. Very deep, diverse credit file going back to the 1980′s.

    Since Sept 2010, I applied for over 10 CC’s and got approved for all of them. 10 CC’s is NOT for someone with a new credit file but these CC’s only dropped my FICO’s to 750+. I will wait at least 6 months to apply again. We are working on my wife’s new CC’s for min spends. We alternate applications between my wife & I. We both have very high credit ratings.

    We are normally very conservative and have no debts. (exception: mortgages on my rentals which are covered by rental income & reserves ($ in the bank to cover vacancies & repairs)).

    Bottom line: Every financial situation is different. We plan out what CC’s we apply for and to make sure we have the funds to pay the bills in full every month! The CC signup bonuses are excellent!! We started up slowly and ramped up gradually!

    Glad there is your article on the 5 dangers of applying for CC’s. Too many people are not cautious enough and get into trouble. I learned the hard way in the 1990′s!! Wish this article was around then!!

  14. @David @Jeff - My concern is that unpredictable external events could impact credit in such a way that lenders raise standards on loans. I personally don’t want to take that risk, but others may feel comfortable with it. As always, do what you’re comfortable with!

    @Daniel – Ha! I’ll edit to be clearer!

    @chemist661 – As you point out, there’s no harm in starting slow and ramping up gradually!

  15. Note to me self….
    1. Get those there credit cards
    2. purchase a credit score from IRS bureau – i thinkin 954 is a goods one
    3. get high school proficienty test or somethn
    4. becoma a chemistrist
    5. buy 3 rentable houses
    6. live it large, fine house, fancee cars
    now hows do i prints this?

  16. @Reader

    “Called reconsideration line, offered to move my entire CL of my CSP (annual fee was due), to the united card, put on hold, two minutes later, approved. Two personal chase ”

    By doing this, your AAOA is shortened. You knew this risk, correct?

  17. @chemist661

    Which puller did you use to get your “FICO”? Are you sure what you got are not FAKO?

  18. Great job, looks like I need to honor this as the MVP Post of the Day!

  19. #6 – accidentally carrying 12 ccs in your wallet.

  20. Wow. I hadn’t heard of iwillteachyoutoberich.com, but this line: “Oh, you want to start trading derivatives but you haven’t even paid off your debt? Please GTFO.” was hilarious!

  21. To the previous posters:

    1. We live a more modest lifestyle than many people perceive. We are solid middle class, NOT rich except for miles/points! We are financially conservative and do not drive fancy cars. Our home (primary) & cars are paid for. Our cars are one 2010 sedan & 2005 sedan–just ordinary (Asian) medium priced sedans bought new. (2010 Hyandai Sonata V6 Limited–paid $21K out the door, 2005-Toyota Camry–paid $14K out the door) Both cars financed with large down payments! We “chase” the great car deals when we are ready to buy and we do our “homework” when buying our cars. My wife’s previous car was a 1995 Chrysler coupe that she bought new in 1995. We keep our cars a very long time and do keep them in prime condition. It does help that we live in a weather friendly environment where cars do not rust. :)

    2. I got my FICO’s from the mortgage lender when they pulled my credit for my refi’s. (798, 804, 820 FICO’s). The recent Experian scores are a decent FICO estimate that a recent CC lender gave to me. I also get monthly Experian score estimates (decent estimates) from several sources. (US Bank, Credit Sesame, others) since Experian does not allow myFICO to disclose their scores to consumers. I got the others (Transunion, Equifax) from myFICO at a modest cost. (I chose to pay for those two FICO’s out of pocket).

    I also have other services where I get decent estimates of Transunion & Equifax scores (FAKO’s) from Credit Karma (free), etc. Alot of credit unions use Equifax (EQ)to pull credit and my # of EQ inquiries are very low. Too bad no other lenders (other than credit unions) pull Equifax here in Southern California.

    A great place to learn about credit is http://www.creditboards.com/forums. That board has been a big help on credit matters, etc. A great place to start!!

    I trust the above information will help the previous posters.

  22. @Paul, yes I was aware of this risk. Keeping the CSP open and paying the annual fee, just to help my AAOA, wasn’t worth it to me. I didn’t mention in my first comment, but I have carried some no-fee cc’s with Chase for the last 6-7 years (college card and Chase Freedom), so I don’t expect to much of a hard impact. Do you recommend keeping some “good” credit cards open (i.e. paying the annual fee) just to help your AAOA?

  23. Temo – the discussion earlier in this thread should help you. Recommend not churning cards before applying for rental home financing unless your credit score is extremely high (800+). Also, it’s easiest to qualify if you have less than 4 outstanding secured home loans (for example one on primary residence and two on other rental properties). Criteria are tougher for loans 5-10, and is is extremely difficult to get more than 10 secured real estate loans.

  24. Hi D- quick question on a random topic.
    I have multiple Chase Freedom cards under my name, do I get 5% bonus on both cards?
    Chase has given me 5% on one of my card and nothing on other for first qtr in 2013. Thoughts?Thanks…

  25. @Mr.D - You should get the bonus on both cards. Sometimes the bonus posts in the next month if you spent close to the statement closing date.

  26. @Hitesh I just leased a car and they ran my credit less than two months after I just got four credit cards( and probably more than ten in the last year)…no problems at all and got a good price.

  27. So my wife and I have been churning CC’s the past year. My wife is a stay at home mom. We may move and purchase a house in 2 years. SO couldn’t I continue to apply for CC’s in my wife’s name and keep my CC history clean, then when it comes time to apply for mortgage- just have it in my name only leaving my wives name off of the mortgage? That way we can still apply for some CC’s despite potentially having a new mortgage soon. Any thought on this?

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  29. @J-M – I believe that many lenders require both spouses to be on the mortgage.

  30. J-M- MMS is incorrect… one of you can be on the mortgage, but you might have to “quit claim” the house into your name if the bank insists. If you are the only wage earner, then adding your wife to the mortgage simply gives the bank one more person to chase after if thing go wrong. A work around for that is to put the house in a trust (you have at least one child, so a trust is a good idea anyway. You can do this concurrently with the “close of escrow”… or basically when the bank gives YOU the loan, you immediately put the house into a trust at the same time. Here in California, we use escrow services and hold title via “trust deeds”. Your state might be different. A good mortgage broker will help you sort all this out, or some internet research would help. At the JP household, we have multiple rentals (nod to chemist… it’s a great idea!) and many of them are held by just one spouse or the other. Our home is held in a trust, with financing in both names.

  31. @JP
    What benefit does a “trust” provide? and is it connected to children?

  32. Hi, Darius

    I just checked my Karma credit score and found that keeping 1-20% Credit Card Utilization is better than keeping 0 balance every month. Does that mean I should keep a small balance every month to improve my credit score?

    Thank you very much!

    Jesson

  33. @Jesson. My two cents. Your credit card utilization looks at overall credit utilization not individual cards. So, no harm in keeping balance of “0″. But on side note, keeping “zero” balance for more then 6+ months removes that “card” from adding longevity to your credit history

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