Credit card rewards are meant to inspire customer loyalty in the form of points for travel and cash back when consumers use their cards. But some cardholders shun loyalty in favor of chasing rewards by opening and closing multiple accounts. While the practice, called flipping, may lead to free travel for some, it could backfire by causing credit troubles in the long run.
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A card issuer's goal is to be "the top card in the wallet," says Nessa Feddis, senior vice president, consumer protection and payments for the American Bankers Association. So it will use rewards as a means to encourage the use and retention of the account.
Some consumers take advantage of issuer competition by opening one or more credit cards offering generous promotions, and once those bonus awards points are used or acquired, closing those accounts and flipping their business to another set of cards to get more perks. While issuers typically don't mind the practice, Feddis says, it does pose a number of risks to your credit score if you don't play the game right. If you are going to flip credit cards for rewards, take heed of the following rules.
Rule No. 1: Understand the process. Card flipping differs from two similar practices. Credit card churning is the process of opening and closing the same account multiple times to get the same sign-up bonuses or promotional rewards over and over again. Card issuers have been taking some steps to curb this practice. For example, American Express won't offer sign-up bonuses to anyone who has ever had a particular card before.
Another practice, rotating balances from card to card (also known as a balance transfer), is primarily used to take advantage of promotional low-interest rates as you pay down a high balance. While this practice can be a smart idea if you're actually whittling down your debt, it can hurt you if you're not careful, says Anthony Sprauve, a spokesman for FICO. "If you're just moving the balance around but not paying it down, you'll be penalized," Sprauve says.
Flipping is primarily done to reap multiple rewards at once, utilizing as many credit cards as you can easily manage, and then eventually closing the cards to repeat the process again.
Rule No. 2: Start with a clean slate. If you're walking around with credit card balances, flipping credit cards isn't for you. The interest you pay each month will negate any rewards you get for using the card, says Todd Zino, an entrepreneur whose company Wallaby Financial created an app to manage credit card rewards. (Disclosure: CreditCards.com has partnered with Wallaby to offer a similar app, WalletUp.) Zino has amassed more than 130,000 points by flipping cards.
In order to cash in on rewards, you typically must meet certain spending requirements. For example, you may be required to spend several thousand dollars on the card in 90 days. Zino pays the majority of his monthly expenses using credit cards, averaging between $3,000 and $4,000 a month, and then pays the entire balance off when it's due. That way he's qualifying for travel points without shelling out cash on interest or buying things he doesn't need in order to meet that spending threshold.
Rule No. 3: Keep card utilization low. One of the practices that can hurt your credit score is using more than 30 percent of your credit lines, says Sprauve.
So make sure you have a credit limit that makes flipping worth your while, says Zino. If you have a low credit limit and you're maxing out the card each month to qualify for rewards, you could be shooting yourself in the foot. But if you're spending, say, $3,000 a month on a card with a $10,000 limit -- and paying it off each month -- your credit score shouldn't take too much of a hit.
Rule No.4: Consider the cost of closing a card. One of the biggest questions card flippers must ask themselves is when it makes sense to close a card account. The main reason for doing so is to avoid an annual fee, Zino says.
But saving money on an annual fee can hurt your credit. If you close an account and reduce your amount of available credit, your credit utilization ratio could rise, which could also ding your score. "You need to think about how it impacts your whole credit picture," Sprauve says.
Rule No. 5: Time new accounts carefully. Creditors want to know that you only apply for credit when you need it, so opening a card account one month and another card account the next can signal trouble. Issuers will check your credit (called a hard inquiry) to evaluate your creditworthiness before granting you a card, which temporarily knocks down your score a few points for each inquiry. If you open accounts too frequently, a card issuer may even deny your application or give you a low credit line. To get around this, some card flippers open multiple credit card accounts on the same day so they end up with several new cards before the damage shows up on their credit score, Zino says. Then they pay their balances responsibly and rack up rewards points for a few months until their credit scores recover and they can apply for new cards again.
However, this practice carries ample risk, Sprauve says. For example, if you are in the market for a car loan or mortgage, you may not qualify for the lowest rates.
Rule No. 6: Plan to invest time. Zino has to track card balances, due dates and looming annual fees each month. You also have to understand the rules of each rewards program. For example, issuers could require cardholders to have an account open for a minimum amount of time in order to receive a reward, Feddis says. "If people want to take advantage of the opportunities, they need to take the time to read the terms and conditions."