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Credit Card Signup Bonus Hunting Hurts Credit Score

If you were in the market for a credit card before the Great Recession, you probably remember the rich rewards companies were offering for you to use their card. Credit was flowing freely and unless you were being paid a $100 gift card to sign up for a card, it probably wasn’t even worth your time! The 25,000 mile or $200 gift card promotions were there for the taking, especially if you had a good credit score [3]. When the economic slowdown hit, those offers dried up. Credit card companies started closing accounts and it was rare to see a good offer unless you had a fantastic credit score. Credit card companies were playing defense.

Well, I don’t know if it’s a recovery based on the economic statistics, but the credit card companies must thinks so because the offers have been coming back in the last year or so. While you won’t see as many $200 or 25,000 frequent flyer mile promotions, they are certainly out there and it may be tempted to go on a signup spree to get all that free cash. I don’t think anyone, except the credit card companies, would begrudge you if you did!

It’s important to know what applying for credit cards, whether it’s one card or eight, will have a negative impact on your score.

When you apply for a credit card, the company makes a hard inquiry [4] on your credit report. Each hard inquiry will drop your credit score a few points and, I suspect, a lot of them will accelerate the drop. Remember, your credit score is a measure of your default risk, the likelihood that you will not pay back your debts. Someone who is suddenly applying for a lot of credit looks riskier than someone who hasn’t applied for a lot of credit. Someone reviewing your credit won’t know that you applied for all these cards to get $100 or $200 a pop each time, they just see someone who needs a lot of credit cards!

What if you don’t care and you want to take advantage of all the programs? The best way to do this is to apply for them all on a single day. Each application will result in a hard inquiry and once that happens, the damage is, for the most part, done. So you want to apply for all the cards and maximize the chances you are approved. The best way to do that is to apply as quickly as possible so that each of the credit card companies pulls your credit before the credit bureaus list the hard inquiry on your report. There’s a delay between when a credit card company pulls your credit and when that pull appears on your report. You want to squeeze in all the applications before the pulls start appearing. This won’t minimize the impact those pulls will have on your score, it simply maximizes the approval rate so you get the most out of the credit score drop.

The negative impact goes beyond just the hard inquiries because the influx of new accounts means your average age will go down too. It’s hard to say how much that will affect your score but it will have a negative impact. It’s not all negative though. The influx of credit also means your credit utilization [5] will go down which is a positive for credit scores. Perhaps that balances out the average age drop… it’s hard to say since the credit score equation is a black box.

I’ve never done this but I know plenty of people have. Have you done this?

(Photo: sovietmole [6])