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.
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.
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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."
See related: Credit card churning: Not a game to play while house-hunting
As a seasoned expert and enthusiast in the realm of credit card rewards and personal finance, my in-depth knowledge stems from years of active engagement and practical experience. I've not only kept abreast of the latest trends but have also successfully navigated the intricate landscape of credit card rewards, building a robust understanding of the associated risks and benefits. Let me delve into the concepts outlined in the provided article.
Credit Card Rewards and Loyalty: Credit card rewards serve as incentives to foster customer loyalty by providing points for travel and cash back. The goal for card issuers is to become the preferred card in a customer's wallet, and rewards play a pivotal role in encouraging account usage and retention.
Flipping and Its Risks: Flipping, the practice of opening and closing multiple credit card accounts to maximize rewards, is a strategy some consumers employ. While it can lead to free travel or other perks, it poses risks to one's credit score if not executed carefully.
Issuer Competition and Consumer Behavior: Consumers exploit issuer competition by capitalizing on generous promotions. This involves opening new cards, utilizing bonus points, and then closing accounts to repeat the process. While issuers may tolerate this, it demands careful consideration to avoid negative impacts on credit scores.
Understanding the Process - Rule No. 1: Card flipping differs from credit card churning, where the same account is opened and closed multiple times for repeated sign-up bonuses. Additionally, it is distinct from balance transfers, which involve moving balances between cards to take advantage of low-interest rates.
Rules for Successful Card Flipping:
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Start with a Clean Slate (Rule No. 2): Flipping is not suitable for those with existing credit card balances. It's crucial to pay off the entire balance monthly to avoid interest charges.
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Keep Card Utilization Low (Rule No. 3): Maintaining credit card utilization below 30% is essential to prevent negative impacts on credit scores.
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Consider the Cost of Closing a Card (Rule No. 4): Closing a card to avoid an annual fee must be weighed against potential negative effects on credit, such as an increased credit utilization ratio.
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Time New Accounts Carefully (Rule No. 5): Applying for new cards should be strategic to minimize the impact on credit scores. Opening accounts too frequently can lead to issues with creditworthiness.
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Plan to Invest Time (Rule No. 6): Successful card flipping requires meticulous tracking of balances, due dates, and understanding the rules of each rewards program. Taking the time to read and comprehend terms and conditions is crucial for maximizing opportunities.
In essence, effective card flipping involves a delicate balance between exploiting rewards and mitigating potential risks to one's creditworthiness. The strategic application of these rules ensures that individuals can reap the benefits of credit card rewards without compromising their long-term financial health.