Every so often, I receive e-mails very similar to the one below regarding credit card bonuses. It’s a valid question, so I wanted to make a thoughtful reply.
Do you ever total up the amount that you actually save on your credit cards via bonus points, mileage, etc? Also, I’ve seen you go through he laundry list of credit cards that you have and I have to wonder what kind of impact this has on your credit rating. Can you post an article or reply with this information? I’ve long held the belief that trying to live by simple means can have a big impact on your savings, but I’m skeptical that you can actually save a substantial amount “gaming” the credit card rewards and tiny discounts of the world. Thoughts?
My initial response to these types of questions used to be quite simple – I like doing this stuff, it makes me money, but it’s not for everyone. However, I got to thinking about how currently bonuses are at historical highs and perhaps it can have a big impact on the savings rate of the average family if they are financially responsible already.
First, some quick stats. According to the US Census, the median household income in the US in 2011 was $50,054. According to the BEA, the savings rate is in the neighborhood of 4%. That means a savings rate of $2,000 a year for the average household (4% of $50k).
According to FICO, about 60% of the US population has a “good” to “excellent” credit score of over 700. Combine this with a slight majority (again ~60%) of people having no credit card debt at all, which means there are many households able to handle applying for credit cards and using them responsibly without hurting themselves by carrying a balance (15% interest can quickly wipe out any potential benefit, don’t do it!). Just because you have a credit card doesn’t mean you need to pay a penny of interest, even while taking advantage of the fraud protection and extended warranties.
Thus, I pose the crazy idea that the average household could DOUBLE their savings rate with careful use of credit card bonuses, as it is definitely possible for such families to obtain $2,000 a year in credit card bonuses. Wouldn’t that count as significant? Credit cards are issued to individuals, so that means a household with two adults would need each person to get $1,000 in rewards. Both my wife and I have been approved in the past for the top tier credit cards with a household income in that range and a 700 credit score. This year, we’ve already earned well over $2,000. Here’s a sample of actual cards that we have gotten recently:
- Chase Sapphire Preferred®. $500 travel bonus after $3,000 in purchases within the first 3 months. Details.
- Chase Freedom® - $100 bonus after spending $500 in first 3 months. 5% cash back on stuff.
- Citi® Dividend Platinum Select® Visa® Card – $100 cash after spending $500 in first 3 months. 5% cash back on stuff.
I’ve also taken advantage of small business card bonuses:
That’s over $1,000 in currently-available offers listed above, I’m not including all the expired offers. Note: There are many other cards with higher potential value bonuses like the Chase Hyatt card with two free nights anywhere, even at $600/night hotels. Or, I could get a bunch of points or miles and get a good redemption value. But for this exercise I’m just trying to stick with things with close cash equivalents like gift cards that can replace existing spending or be sold easily for cash.
A basic strategy would to apply for a new batch of 2-5 cards (no more than 2 from same bank issuer, best to do all on the same day) once every 3-6 months. Applying for additional credit cards will lower your credit score, temporarily. As time passes, the effect of each inquiry diminishes, until after 2 years the effect is zero. In my mind, the sign-up bonus along with an often-waived annual fee is an agreement for you to try out the card during that first year. If you like it, then you should keep it. If you don’t like it, there is nothing wrong with canceling the card to avoid the annual fee, and it won’t hurt your credit score very much.
Going back to credit scores, you can see all my free credit scores here from all the bureaus. My credit scores actually stay up quite well at about 5 temporary points lost per card, I’m sure many others can chime in that they have earned hundreds if not thousands and also have good credit scores. Is a few thousand dollars a year worth this extra effort? That’s up to you. It is for me.
Update: I forgot to add – credit cards rewards are also not subject to income tax.