11 minute read
the Credit Card Points Game
Points to Ponder
How to Master the Credit Card Points Game
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By DeBra ehrenBerg
You have definitely heard about them. It seems like everyone uses them. And you want to better understand what they are.
Credit card points seem like the hot topic around town. Personally, they have afforded me and my family the opportunity to travel across the country, to Israel, and various places in between. They have also afforded me and my family the opportunity to stay in hotels that we would probably never have had the opportunity to stay at. This article will aim to give you an introduction as to what credit card points are, how to utilize them, and how to build up your credit card point portfolio to maximize your point benefits.
Before we begin, I would like to make a disclaimer: I am not a registered financial advisor, nor do I play one on TV. This article is not intended to provide any sort of financial advice. Anything presented is from my own research and learning. On this note, I would like to thank Dan Eleff of “Dans Deals,” who runs a fabulous website and forum where he shares deals and delves into the ins and outs of credit card points. Much of my knowledge comes from reading through his posts and then playing the “points game.”
I also would like to offer a word of caution. According to Dan Ellef, “The credit card points system is partially funded by the millions of users who do not pay their credit card in full when the bill is due. It is very enticing, and the credit card companies make it all too easy to fall into the trap of debt and then paying huge interest to the banks.”
If you may fall prey to this, I recommend paying for things in cash. You can go to sleep at night knowing that you are not in credit card debt. Any gain in the “points game” will be negated by the interest payments to the bank. However, if you stay on top of your game, aside from earning rewards, you can take advantage of many credit card benefits, such as return protection, extended warranty, car rental insurance, and much more.
Assuming you can stay on top of your spending and pay your credit card bills in full and on time, then it’s time to take a dive into the benefits of credit card points.
Credit card points are basically currency that banks issue to credit card holders based on spending. Different credit cards offer different “currency.”
Firstly, there are cash back cards, which are a good way to get 2% back on all your purchases with no annual fee. This is a solid option, but often one can do better.
The second type of card is an airline/hotel credit card that offers points in the form of the specific airline/hotel. The downside of these cards is that the points are locked to just one brand. However, many hotel cards offer a free night (within certain parameters) with the annual fee card. Additionally, almost all airlines offer one free piece of luggage for the cardholder and a certain number of companions with their annual fee card. This can be a wise option for someone who travels frequently on a specific airline.
The third type of card is a transferable point-currency card. These are cards that allow you to earn points and use your points in a variety of ways, including using points towards bill payments, redeeming for travel, and even transferring points to other reward programs.
Like many things in life, with a little patience and wisdom, one can build their credit card portfolio to include cards from each category to reap the most benefits. I suggest keeping a basic spreadsheet containing information such as: credit card type, date opened, sign-on bonus, spending category bonuses, card benefits, and date closed in order to stay organized.
There are a few ways to earn points from your credit card. The first is through a sign-on bonus. A sign-on bonus is basically a large chunk of points that will be issued to your account once you meet the terms of the credit card, typically in the form of spending a certain amount of money within a certain timeframe. Once you reach the spending threshold, then the bank will issue you the sign-on bonus and the points are added to your account. This is often the quickest and most “lucrative” way to earn points.
The second way to earn points is by everyday spending. In order to reap the most benefits in this category, I suggest that you make a note of which credit card to use for what spending. Different credit cards earn different points at various venues. For example, certain cards earn 2X points at restaurants, others earn 3X points for travel, while another earns 5X points at office supply stores. One can really do well by using the “right” credit card for specific spending.
A third way to earn points is by referring friends for specific cards. Some credit cards have a refer-a-friend offer, where you can earn a bonus if your friend applies for and is approved for that credit card using your referral link.
I will now answer the question that many of you probably have had from the get-go. Doesn’t opening (and closing) multiple credit cards hurt one’s credit score? The answer is, not really. As delineated on Dansdeals.com, your credit score is broken down as follows: -Payment History: 35%. Pay your bills on time and this category should be easy. -Amount Owed: 30%. This measures your credit uti-
lization ratio. The more money you spend, the higher your utilization ratio will be, which lowers your score. The more total credit you have available, the lower your utilization ratio will be, which raises your score. So the more accounts and credit that you have, the better your score will be here. -Length of credit history: 15%. This takes into account your oldest account. The older, the better. It’s important to note that even if you close an account, it stays on your record for about 10 years after you cancel the card. So even if you close an account, you won’t hurt yourself in this category until 10 years down the line when the account falls off of your credit report. By that time, you should have other older cards that will keep your average account age high enough not to adversely affect your score. -New Credit: 10%. This takes into account credit inquiries and new accounts, which can lower your score temporarily. These fall off your report after about two years and most banks only look at the number of inquiries you have within the past six months. In the shortterm, you may see your score drop when you apply for a card due to this category and the average age of your accounts, but in the long-run having more cards will raise your score, as they improve your payment history (35%) and credit utilization (30%) and eventually the age of your account, which continue to grow older even after you cancel the card. -Types of Credit Used: 10%. This has little to do with the opening and closing of accounts but factors whether you have other accounts like retail accounts, auto loans, a mortgage, etc. The more varied your portfolio, the higher your score.
When you consider the above, opening new cards only will impact your credit score under the New Credit (10%) consideration. And even so, it is a temporary effect. However, keep in mind that closing a credit card will negatively impact your credit utilization ratio. I would also warn against closing a credit card within 12 months of opening, as it may trigger speculation by the bank.
So why not open multiple credit cards and keep them open? Why are we even talking about potentially closing them? What benefit, if any, does closing cards have?
First off, you must get approved for each card. Different credit cards require different credit scores. There are steps one can take to build up their credit score. You can start off by becoming an authorized user on a relative’s card. Ensure, though, that this card is being used responsibly and that the bill is paid in full. That should give you a credit boost. From there, you should be able to get approved for a store-branded card, which are easier to obtain. Once you have built up your credit, you can then begin to build up your Chase and American Express (AMEX) portfolios. While there are other bank-issued cards, I will focus on these two for this article. Just as an example, my 19-year-old son was approved for a Chase student card, which is a nice option for students, and a few months after that, he was approved for a Chase card that required excellent credit. I will mention that he was an authorized user of credit cards in both my and my husband’s name since he was 16 and therefore had a solid credit history. I would encourage parents of teens to consider adding their children as authorized users to one of their credit cards, not to promote frivolous spending, but rather, to give them a head start in building up their credit score.
Assuming that you are approved for a credit card, it is important to keep in mind that Chase has a 5/24 rule. What this means is that they will typically only approve you for their cards if you have been approved for fewer than 5 consumer cards from any bank in the past 24 months. That means you’ll want to start getting Chase cards before moving onto other card opportunities. You can see how many cards you have been approved for within the past 24 months by checking your credit at annualcreditreport.com, the federally authorized site for annual free credit reports. If there are any mistakes on your credit report you should dispute them immediately by contacting the three credit bureaus, Equifax, Experian, and Transunion.
Another application rule to keep in mind is that AMEX will typically only award a sign-on bonus once per lifetime, though reports are that you can get another bonus after about 6-7 years. A popup will come up after you submit an application asking if you want to proceed without earning the welcome bonus, if you don’t qualify for the bonus.
Another item to consider when applying for or closing a credit card is if there is an annual fee. Typically, cards with more benefits will carry an annual fee. The bottom line consideration is this: Is the annual fee worth the benefits that the card carries? There are cards with high annual fees that offer excellent benefits and therefore may be worth keeping open. There may be other cards with smaller annual fees, but the card’s benefits aren’t all that great. If you apply for a card and are approved, and after receiving the sign-on bonus decide that you do not want to keep the card open, you can contact the credit card company to close the account. Please always ensure that you will not lose the points that you have gained. It is almost always prudent to keep a no-fee card opened in each specific bank or branded card for a place to “dump” your points. Additionally, it never hurts to ask the representative if they are willing to waive the annual fee or if there is a promotion, as you are considering closing the account. Many times, I have had this offer made and therefore have kept the card in question open for an additional year.
An additional reason that you may want to close a card is so that you can reapply for that card in order to earn the sign-on bonus. As mentioned above, however, AMEX typically offers sign- on bonuses once-per-lifetime. However, Chase has different timeframes for different cards regarding the ability to earn sign-on bonuses. You can successfully close a card, then wait the required time, and reapply for the card. This is called “churning cards,” and it can prove point-lucrative.
Most banks offer both consumer cards as well as business cards. Business cards do not count towards Chase’s 5/24 rule. However previous cards opened count when applying for a business card through Chase. Meaning, the 5/24 rule is considered when applying for a business card. If you have a business or side business and want to keep track of spending, you can apply to open a card using your name as the business. Just be sure to select “sole proprietorship” as the business type and use your social security numbers as the Tax ID.
Regarding which cards may be right and provide you with the most benefit, I suggest looking through the various Chase and AMEX cards to get a feel for what is out there. The website creditcards.com allows you to sort through credit card offers based on various filters (travel, cash back, credit score, etc.). The options may seem overwhelming at first, but don’t let that deter you. Check out the card benefits, sign-on bonuses, and annual fees. Keep in mind the 5/24 rule when applying for cards and consider whether business cards may be right for you. Always stay on top of your cards, and you too can play the “points game.”
Debra Ehrenberg is available for consult regarding specific card referrals, benefits, and utilization and can be reached via email at pointstoponder111@gmail.com.
