Credit Card Signup Bonuses and My Credit Score

Whenever someone mentions needing to earn some extra money, I attempt to point them in the direction of earning signup bonuses for opening new credit cards if I think this person can handle a credit card responsibly (i.e., pay off the balance in full and on time every month). I've earned a couple thousand dollars this way over the course of about three years. One of the first things people usually say, though, is, "won't that hurt my credit score?"

I attempted to answer this question before in my post, How Opening New Credit Cards Affects Your Credit Score, but after getting involved in the mortgage application process, I feel like I have learned a little more on this subject. What follows is an explanation of exactly what will happen to your credit score if you open a bunch of new cards in a short period of time (and use them 100% responsibly).

My credit score is quite good, above 700, as high as I need it to be to qualify for the best mortgage rates, but my score is not as high as I feel it should be considering that I have never paid a bill late or carried a balance on a credit card (thanks to Mom and Dad for teaching me good credit habits at a young age). Here are the things that the credit bureaus say have dinged my score, along with my explanations for each one:

-Time since most recent account opening is too short. Yup, it's only been about three months. Despite all the cards I have, I didn't have a good cash back credit card so I applied for the Chase Freedom card, which gives you 3% back on your top three spending categories (like groceries, utilities, etc.) each month and 1% back on everything else. It didn't hurt that they had a $50 opening bonus at the time, too. (By the way, I hear American Express Blue is also a good cash back card, but I haven't checked it out for myself yet.)

-Length of time accounts have been established. This one I take slight issue with because I've had a couple of the same cards for years, but on average my oldest account is probably only a year old or less because of the frequency with which I open and close accounts. I know they say not to close your old accounts, but I don't like to have them just sitting there where I could lose track of them. That's just one more credit card number someone can steal from me or an annual fee I could accidentally get stuck paying. Why risk that for a few credit score points?
-Too many inquiries in the last 12 months. This one is partly my fault for applying for so many cards and partly a flaw in the system because I didn't make all my mortgage applications in the same short time frame. You are supposed to do all your applying for one loan (auto loan, mortgage, etc.) within a 30-day time frame so that it will only count as one knock on your score. Since I have sort of randomly applied for mortgages over the last several months, I get more dings. I think that's kind of stupid, frankly. It's also probably a situation that applies to lots of people who maybe want to get an idea of whether they would qualify for a mortgage even though they aren't ready to follow through on the application yet. This was the case with me.
-Too many accounts with balances. This one makes me mad because I always pay my balances in full and on time each month. Who cares how many cards I use? Different cards offer different benefits. If I want to earn 5% back on my clothing purchases, the only way to do that is with my Gap card. If I want to earn 3% back on groceries, the only way to do that is with my Chase card. You get the idea. If anything, shouldn't I be commended for maximizing my cash back and being able to manage multiple accounts responsibly? Apparently not.

-Ratio of balance to limit on revolving accounts is too high. This scoring measure is also highly flawed. Let's say you have only one card, that the card has a $1,000 limit, and you charge about $900 on it every month. You then pay off the balance in full and on time every month. You'll get dinged for this on your credit score because you're using 90% of your available credit. Instead of credit bureaus looking at you as perhaps being, oh, responsible, they whine that you're using too much of your credit. What's the point of having it if you can't really use it? I've read that you should always keep all your balances under 50% of the limit. So doesn't that effectively make your credit card limit half of what it actually is? Oh, and if you call the credit card company to get your limit raised, they'll probably do it, but that will count as an inquiry on your credit report (also known as a "hard pull") and that will ding your score, too! It's really a lose/lose situation.

-Don't have a mortgage. This is my favorite one (note the sarcasm). Apparently, having a mortgage and paying it on time improves your credit score. Why should people not be able to get the maximum credit score just because they rent? That's ridiculous. Of course, as I've stated before, having the maximum possible score doesn't get you anywhere special, and, for silly reasons like this one, no one can really achieve the highest score.

Putting aside my A student complex for a minute, the one that tells some nagging part of my brain that I should be able to get an 850, the credit scoring system really is flawed. It's easy for me to tell myself, or you, that because of this, you should just ignore their petty rules and do what works best for you, whether that means committing the sin of closing your oldest account or opening five new cards because you want the frequent flyer miles. However, when you need a loan, suddenly it's easy to feel like a slave to your credit score and wish that maybe you had done some things differently.

The moral of the story basically remains the same as in my original post, though: if you have excellent credit, playing the credit card bonus game probably isn't going to hurt you. However, if you're trying to improve a low or average score, play nice and follow the rules, ludicrous though some of them are. Remember: the watchful eyes of the credit reporting bureaus are upon you.

Photo by mikebaird

Related posts:
How Opening New Credit Cards Affects Your Credit Score
Making the Most of American Express Rewards Points
Beware American Express Card Upgrades!
How I've Earned $1250 in Free Money This Year

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