Getting Credit Cards for Fun, but Mostly for Profit
Every few months, I get a new credit card. Not because I need it or because I’ve maxed out my current ones, but simply because the credit card company is willing to pay me decent money or miles to try out their card. Many credit cards offer $500 worth of points or miles for spending three or four thousand dollars in 3 months, or around $1000-1333/month.
Once you’ve opened two or three credit cards, there’s really not much time or effort required: Researching the card takes about 15 minutes, applying for it takes about 5 minutes, activation and online account setup takes about 15 minutes. redeeming for cash/travel takes another 10 minutes or less and closing the account (if necessary takes another 15-30 minutes). Call it a total of 1 hour, 15 minutes (and usually less) and you’re talking $400/hr for your effort. Who am I to turn down an easy hour of work for what most people don’t earn in a day?
The Credit Card Trap: Who is getting trapped?
Before extolling the amazing benefits, there are downsides to using those little pieces of plastic. Many, many people have fallen into severe financial hardship my using credit cards as the issuing companies hope-to ensnare people in high interest, long-term loans and profit from their mistakes. In order to entice people to sign-up, many credit card issuers offer incentives to lure unsuspecting consumers into their trap by offering them anything from t-shirts and mugs to cash and travel awards. Prudent customers would do well to focus on just those offers that they value as worth their time will help us avoid getting trapped by low value rewards (think t-shirts, mugs and toasters).
What credit cards bring to the table
- Perks: credit card companies offer all kinds of perks that you would normally expect to pay for. Depending on the card, users can get free access to airport lounges, free rental car coverage, statement credit on purchases from certain stores, refunds on TSA Pre-check or Global Traveler, free checked baggage, free hotel stays, no foreign transaction fees and on and on. Finding the right card can be easy if you’re just looking for some cash back, but can take more searching if you are looking for certain perks to add to your credit card stable.
- Sign-up bonuses: many cards for people with good credit offer $500 or more in cash or equivalent in miles or points for signing up and meeting a minimum spending requirement, often around $3000 over 3 months. Getting $500 back on $3000 equates to 16.67% back on those purchases.
- Cash back on purchases: some of the cards I like to hold on to give 5% back in certain categories, like restaurants, gas stations, or department stores This cash back can sometimes be year-round or during certain quarters o the year. During the last quarter of last year, my Chase Freedom card offered 10% back on Amazon, which significantly cut our net Christmas spending last year.
- Purchase protection: many cards will refund you the difference if you find a lower advertised price on an item in the next few months. It often takes a little effort, but for large purchases, you can save significant cash.
- Financial and fraud protection: if your card is lost or stolen, you are generally not liable for any fraudulent purchases that are made on your account. Having $1000 dollars in your wallet being stolen doesn’t have the same promise.
- All these credit card points/miles are completely free of federal taxes as they are merely rebates on money spent. Using the $2 = $1 math, a $500 cash back bonus is like getting a $1000 bonus at a job, after accounting for all related taxes. For someone earning $50,000 a year, that’s more than a week’s worth of work
But won’t that hurt my credit score?
The short is no, or not very much. Credit card scores depend on several factors, length of credit history, available credit, recent credit inquiries, percentage of credit card utilization and any late payments or other negative history. There’s many great explanations of credit factors including this one.
Adding a new credit card does have a very small effect (less than 5% for me or my spouse per request) for several months. As time marches on, though, the higher available credit and the lower utilization rate actually increase my score. Then there’s this guy, a popular blogger who has 30+ cards and a score of 805.
I am more concerned about how frequently I apply for new cards, since some companies, notably Chase Bank will decline requests for cards if they’ve opened 5 or more cards from ANY company in the past 24 months, the so called 5/24 rule. This also includes adding someone as an authorized user on the account, so we’ve stopped adding authorized users to existing accounts.
Take the Money and Run (or not?)
Credit cards are simply a tool. Much like a chain saw, credit cards can be very helpful with the right discipline or downright dangerous when used improperly. Smart consumers can use the credit card’s offers, benefits and sign-up incentives to great personal financial advantage by carefully playing by the game.
Credit card companies make money from their customers in several ways: they make money from any balance that isn’t paid in full each month; from the merchant for each sale transaction; from annual fees and other fees like balance transfers and cash advances.
Avoiding the finance charges and late fees on cards can be completely avoided by following the following steps after receiving the card:
- If an annual fee applies, add a notification in my calendar for 11 months in the future to cancel the card
- Sign the back of the card
- Activate the card
- Setup automatic bill payments for the full statement balance every month before ever using the card
- Proceed to spend the necessary amount to receive the bonus
- Start looking for a new card to add
- Make sure points/miles post to account as indicated
- Use points before cancelling card
- Cancel card if not intending to make it a keeper
Ideally, I like to keep credit cards as long as Warren Buffet likes to hold his stocks, that is, forever. However, there are many instances where after using the card for a few months, it is not in my best interest to hang on to it. Usually that is because an annual fee might be coming up and I really haven’t used the card enough to justify paying the fee. Then there are sometimes when it just makes sense to cancel as there are not enough reasons to stay: maybe more recent cards offer all-around better rewards or customer service is atrocious.
I personally feel very little pity for companies when I cancel a card, though I do try to sign up for cards that at least have the potential to stay with me for a while. Companies do spend lots of money in rewards trying to entice customers to get the card and I don’t want to be seen as just a churn-and-burn type customer–at some point that would likely cause me to be denied for cards which I would otherwise be qualified for. Chase’s attempt is one instance demonstrating that businesses are looking more closely at how many cards people are signing up for. Establishing good relationships with these potential money faucets can also get you even better offers.
My Favorite Cards*
My favorite card seems to always be the one that I don’t yet have: card envy, I suppose. In this case, it’s the new Chase Sapphire Reserved.
- Chase Sapphire Reserve: 100,000 points (worth at least $1000 cash or $1500 of travel through Ultimate Rewards) when $4000 spend in 3 months, plus $300 travel credits per calendar year, $100 Global Entry or $85 TSA Pre-Check fee reimbursed, Priority Plus Select Lounge Pass, 3X points on travel and dining. $450 annual fee, not waived.
- Chase Sapphire Preferred: 50,000 points (at least $500 in cash, $625 in travel) when spending $4000 in 3 months. Annual fee waived for first year, then $95/yr.
- American Express Premier Rewards Gold Card/Business Gold Card: Offer varies, but can periodically get 50,000 points, worth at least $500 in gift cards or even more through points brokers or transfer partners. The business card also doesn’t count against the 5/24 chase rule
- Capital One Spark Business Card: Not always superior to other cards for travel redemption, but $500 after spending $4500 in 3 months and 2% cash back on everything! This is my everyday spending card as unlimited 2% cash is somewhat rare for most cards. $59 annual fee that is waived for the first year.
- Capital One Venture Card: Similar to above, but for personal. Earns 40,000 miles after $3000 in purchases in 3 months. 2% back in travel reimbursement, which isn’t as great as 2% cash back, but not bad. Also has $59 annual fee that is waived for the first year. In my personal experience, Capital One has always waived this fee each year after a 5-10 minute call threatening to cancel.
- American Express Platinum card-see case study post for all the gory details
- Pentagon Platinum Cash Rewards Plus Card: Not as flashy as the others and a meager $100 signup bonus after spending $1500 in 3 months, this card is great as it earns 5% cash back on gas purchases if there is another qualifying account at Penfed. I love that the 5% cash back is automatically credited at the end of the billing cycle-no action required on the user’s side.
The above is just a short list of those cards I love and one that I really want to try-as soon as I am under the 5/24 rule again. Rotating through these cards when the offers are good will keep a steady stream of extra money or travel miles rolling in. Having a business adds to credit card options and can keep you under the 5/24 rule (at least for Amex business cards) while still getting some great credit card offers.
Having a spouse or significant other makes it even easier to avoid the 5/24 rule by staggering applications (and avoiding adding authorized users). Since there are 8 quarters in 24 months, it’s easy to alternate applications every quarter (i.e. Person #1 applies for card #1, then three months later Person #2 applies for card #1, then Person #1 applies for card #2, etc.) without triggering the 5/24 rule. just make sure to apply for card #5 for person #1 at least two years after the date of the one you applied for first. Substituting a business card or five in place of a personal card will keep you comfortably under that threshold and will allow you to pick up a great new card if one comes out and you’re right at the limit of the 5/24 rule.
Of course earning the rewards is just one part of the puzzle, redeeming them for cash or travel is the true reward. When it comes to redeeming points and miles there are a dizzying array of choices and options. That will be the subject of a later post.
What is your favorite credit card and why?
* I do not receive commission or compensation for any of the referral links above, however, they might be added in the future.