Monday, June 30, 2008

Credit Card Churning: How to use credit card signup bonuses to get lots of free miles, cash and prizes!

This is part eight in a series on Credit Card Education.

Part 1: General Credit Card Information
Part 2: Credit Reports and Scores Explained
Part 3: Building Your Credit - Your First Credit Card
Part 4: Fixing Your Credit – Tips And Tricks
Part 5: Where To Check Your Credit Reports And Scores
Part 6: Amex Financial Review
Part 7: Store Credit Cards
Part 8: Churning Credit Cards - Tips and Tricks
Part 9: Credit Cards With Great Signup Bonuses

Many credit card companies offer all sorts of amazing incentives to get you to sign up for one of their cards. Most of these cards come with an annual fee, but are free the first year.

Follow these tips and you can start earning hundreds of thousands of miles a year.

It is true that applying for a card lowers your score. Usually, when the card first shows up on your credit report, your score may drop again. However, after a few weeks, your score will rise, because you now have more available credit. Depending on how old your cards are, your score will also go down a couple of points because now the average age of your cards is younger.

Many people think that it’s too good to be true! Well, it is true! With minimal effort you can be making an extra few thousand dollars worth of miles a year!

Here are some tips to help you play the game right!

Keep an eye out on your score!
Get your score above 750 before starting to churn cards. Definitely not lower than 700. Check your score every once in a while to make sure your score is not dropping too much. Read here about where to check your scores. Make sure to check your fico score if you want to maximize your earnings.

How often can I open a card?
Opening one card a month or two (or a few cards every few months) is generally a good balance between getting lots of miles and yet not having your score drop too much! If you are planning on buying a home in the next 6 months, then you might want to hold off on opening lots of cards, as in the short term your score will go down a bit.

Personal Vs. Business:
Business credit cards are better for churning than Personal credit cards. Business cards don’t show up on your credit report at all. Therefore, when canceling, it won’t affect your score. However, Business cards are often harder to get approved for.
With a personal card, your score will drop:
1) When you apply
2) When the card first shows up on your report
3) When you cancel the card – unless done the right way, see below.
With a Business card on the other hand your score will only drop when you apply for the card.

No pre-set spending limit:
Problem: If the card has a ‘no preset spending limit’, it can hurt your score. The reason why opening a card doesn’t hurt your score in the long run, is because you now have more available credit. If your card has “no preset spending limit”, then that will often be considered as “$0 spending limit” on your report, so every month, you will be spending more than your limit.

Solution
: One way to deal with this is to pay your bill before it closes so that when your bill closes it will show a $0 balance.

Some cards use your highest balance as your available credit, so if one month you spend a lot, then that amount will be considered your available credit for future months. So if one month you spend $754 on the card, from then on, your card will show as having a $754 credit limit.

Canceling Cards:
  • Don’t cancel the card within the first 6 months of opening the card. There have been stories of companies confiscating points in such situations.
  • Personal cards:
    • before canceling, try to move your credit to another card within the same company, so that your total available credit won’t go down.
    • If it is a no-annual-fee card, and it's from your oldest cards, then better don’t cancel it.
  • Business Cards: There is no problem canceling a business card. Being that it was not on your report to begin with, losing the available credit will not affect your score.
Opening more than one card with the same airline
Most airlines officially let you earn their bonus miles only once. Some airlines forget after a year or so.

One way to get the miles again and again is to apply for a second card without writing your frequent flyer number on the application. You will be automatically assigned a new number and given the bonus miles. After you get the bonus miles, call the airline and ask them to combine your frequent flyer accounts. This method seems to be hit or miss, and lately seems to be way more misses than hits.

The one card which lets you consistently earn the bonus again and again is Citi AAdvantage. Read the post on getting lots of Citi AA cards.

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