The essence of a free market is competition. Without it, consumers are left to be at the mercy of monopolies that can control prices and curtail supply. Fortunately, American credit card users enjoy one of the most competitive markets possible.
Cardholders have their choice of dozens of card issuers that offer hundreds of products. The competition is so fierce that these companies are willing to pay their best customers to try their products. These payments come in the form of cash back or loyalty points such as frequent flier miles or hotel points. Cash back awards start at $100 and loyalty point offers can be so valuable as to represent over a $1,000 or more of value.
So why don’t more credit card users take advantage of these amazing offers? Let’s examine the top three reasons.
Will applying for a new card hurt my credit? While maintaining a high credit score is a very important concern, applying for a new card by itself will not damage one’s credit. In fact, opening up a new account will often improve one’s credit score. For a given amount of debt, being extended new credit will lower one’s debt to credit ratio. This is the proportion of total outstanding debt relative to the total amount of credit extended.
However, opening up several new accounts in a short period of time will reduce the average age of credit extended and the number of recent inquiries. Both have a negative effect that is small, but temporary. Therefore, applying for a single card every few months will have a negligible effect on one’s credit.
If I don’t like the card and cancel it, will that hurt my credit? Again the answer is no. First, cardholders should keep the card for the first year. There is no need to cancel a card unless or until the annual fee is due. Cancelling several cards at once will hurt one’s credit score by raising his or her debt to credit ratio, in the opposite way that opening an account will help. Therefore, it is best to close accounts over time, just like it is best to open accounts one at a time.
Isn’t it wrong to open an account just for the sign up bonus? Banks choose to make these offers in order to attract new customers. They know that some will take the bonus and cancel their account, but many will remain loyal customers for years. Consumers who accept these bonuses are giving banks the opportunity to earn their business. Both sides agree to the terms, and frankly, most consumers are not in much of a position to take advantage of a multi-billion dollar bank.
By considering the benefits and drawbacks of lucrative credit card sign up bonuses, consumers can earn the fantastic rewards simply by offering banks the possibility of earning a new customer.
You can learn more and compare offers here.