Taking Credit Card Offers Hurts Your Credit

Last week, I wrote about how to turn your good credit into cash. I purposely excluded credit card offers from the list because I wanted things that, should you implement them, wouldn’t hurt your credit. Today, I want to warn to the overzealous.

Despite the credit crisis, there are a lot of credit cards still offering new accounts a special bonus. Some award you points after your first purchase. Others offer you cash back after you spend more than a certain dollar amount. In fact, New York Times money blog Bucks reported that the British Airways Visa Signature card would soon be offering a staggering 100,000-mile promotion, worth two round-trip tickets, to new cardholders, making it one of the richest offers I’ve ever seen.

It sounds like a win-win situation right?

Unfortunately, every time you take advantage of one of these offers your credit score takes a punch to the face. Everytime you apply for a card, your credit report gets hit with a hard inquiry and those hard inquiries negatively impact your score by a few points. The exact number of points it goes down is unknown but you can rest assured it will go down.

If you’re not planning a major purchase within six to twelve months, it’s not a big deal. If you are, you could see much higher interest rates on those loans… making that bonus look really stupid.

Are there offers that won’t ding your credit? Yes.

In general, promotional offers from banks and brokers will not hurt your credit. Since there is no extension of credit, banks and brokers usually won’t pull your credit but you should call to confirm this. Banks will not conduct a hard inquiry unless you open a checking account with overdraft protection. Brokers will usually not do a hard inquiry unless you open a margin account. In both cases the bank or broker may find themselves lending you money for a short period of time, which is why they do a hard pull.

Outside of those two more common scenarios, they will only do soft pulls to confirm your identity, as required by law. Bank offers will usually be in the $100 range and you’ll be expected to maintain a sizable deposit, setup bill payments, and establish a monthly direct deposit before they’ll pay out a promotion. Brokers will usually require a minimum deposit and at least one trade. The promotional requirements are usually not terribly onerous.

With the economy starting to recover, I think you’ll start seeing more and more of these offers.

Jim writes about money at personal finance blog Bargaineering.com.

(Photo: armydre2008)

Comments

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  1. chucklebuck says:

    The exact number of points it goes down is unknown but you can rest assured it will go down.

    This is something I think should have gone into any credit reform act that got passed – requiring clarity and transparency in the way credit scores are calculated. Isn’t it just a little crazy that such a major factor in our financial lives is secret from us?

    • HowSoonIsNow says:

      @chucklebuck: It’s also just a little crazy that your credit is adversely affected by applying…for credit. Credit scores are completely anti-consumer.

      • FormerlyAnonymous says:

        @HowSoonIsNow: Presumably, applying for credit only negatively affects credit scores because they’ve found the correlation between multiple applications and defaults.

    • FDCPAGuy says:

      @chucklebuck:
      Applying for new credit would only theoretically impact your age of credit and new credit portion of the FICO score (unless you go and jack up the balance too). Those two factors account for 25% of your overall score (per myfico.com). The maximum FICO score is 850 which means at worst a new card could drop your score 212 points. Of course that’s a way outside the box worst case scenario but there ya go an idea of what is possible.

    • korybing says:

      @chucklebuck: I’m still pretty new to the world of credit, and I absolutely do not understand credit scores in the slightest. It seems like any time you try to be a responsible consumer your score goes down. Try to get an accurate idea of your score? Score goes down. Apply for more credit? Score goes down. Look at it the wrong way? Score goes down. Think about it too much? Score goes down. Accidentally insult it’s mother at a party? Score goes down.

  2. wcnghj says:

    A punch?

    I’ve seen at most 15 points lost for a few(3) months.

    • Stephmo says:

      @wcnghj: I know – and I think that’s the excessive one. I believe the individuals can rack up, what, 9?

      Sure, if you went out and applied for everything under the sun, it would hurt you, but it SHOULD hurt you at that point. If you’re going around and saying “yes” to every preapproved offer out there, it means you don’t give two craps about the type of credit that’s extended to you. It means you just want credit.

      If you just want credit and you’re not considering terms, rewards, benefits and/or anything like rate or need, you’re likely not going to be all that discerning about repayment should things ever get a little rough.

      Really, the random pickup from a preapproval offer isn’t your big issue in this case – and frankly, this isn’t the worry. Here are your worries:

      - Accepting EVERY single, “can I interest you in saving 20% off your purchase today with a [insert store brand credit card] today?” There are people that do this for literally every single store out there just to save a few bucks. And the default rate on these is crazy high.

      - Mailing back every single preapproved credit card offer because you figure the 500 bucks that they have to give you will help build up an ermgency fund. Yeah, bad plan.

      Honestly, if you’re discerning, you’re good.

  3. metsarethe... says:

    Like every good piece of advice, everything in moderation!

  4. XianZhuXuande says:

    Don’t apply for credit right before you enter a major loan deal, such as a mortgage. Keep clear six months, or even a little longer. It applies to a much smaller extent to cars. Not so important for anything else unless you’re collecting accounts.

    The hard inquiry ding is trivial and doesn’t last very long. The benefit in the long run of a positive open tradeline with activity is much more important. Two or three credit cards hits the ideal but there’s nothing stopping a person from clearing 800 with more than a dozen credit cards.

  5. lmarconi says:

    So follow-up question:

    I have 2 cards that aren’t rewards cards that I got when I was just building my credit in college. It’s a few years later and I’m looking to switch one to a rewards card. Neither of the companies (Capital One and BoA unfortunately) seem to do a switch, they both make you apply for a new card, then close your old card.
    A) Is there anyway to get around this? Has anyone had any luck switching a non-rewards card to rewards card?
    B) I’m not planning on any major purchases lately and I have an excellent albeit limited credit history, but if all hard inquiries hurt your credit is it not worth me applying around for a rewards card?
    Stupid credit card companies. I just don’t understand why someone can’t just review my account, realize that I’ve been in good standing for x number of years and switch my account to something at provides a better deal. Probably because I pay them off every month and I’m therefore a crap customer in their eyes…

  6. Mozoltov, motherfucker says:

    I just got a store credit card after having fucked up credit for several years (never lend a chick, no matter how hot, your credit for a phone). I now want a regular credit card instead of the JCPennys card I have ( I buy more electronics than clothes), will I mess up anything if I apply for a regular CC (I have had the store card for 3 months now.).

    • pecan 3.14159265 says:

      @not_a_virus.exe.vbs: No I don’t think so but you’ll want to do a lot of research into the kind of card you should get because you should plan on stopping any applications after the second one. You’ll probably have a low credit limit but you should sit on it to build credit then ask for an increase months or a year down.

  7. littlemisslondon says:

    Wow. How do I get one of those Chase/BA cards? We’re planning a trip to London next summer and it would be awesome not to pay for airfare. I have good credit: one card which I PIF every month and no debt other than our mortgage (which we have never been late on) and a credit line which we’re less than 2 grand into. Not planning any major purchases for quite a while.

    Pick me, BA! Pick me!

  8. almightytora says:

    A hard inquiry can reduce your credit score by about 2-4 points. If you have decent enough credit, 2-4 points won’t hurt you, but don’t apply for so many cards or those points will make a difference.

  9. vdragonmpc says:

    Bah. I just got a song and dance from Discover card. They sent me a card with a 17.99% rate. I have a high fico and clean credit. I called and asked why it was so high. They claimed that the new “CARD ACT” was forcing them to raise rates on all new accounts.

    Then they tell me this gem: after using the card I can try to get the rate changed at the expiration date! Really? REALLY? I dont plan on ever swiping the card through anything but the ol trusty shredder. They had zero response and were generally useless. Why would I use a card with crap rewards (1% now) when my visa is 7% with 5% rewards?

    I have no sympathy for the credit industry or banking right now.

  10. thebigbluecheez says:

    @Eldritch:
    Denial
    Anger
    Bargaining
    Depression
    Acceptance.

    I think I’m pulling out of depression and getting ready to be in acceptance.

    (I meant this to be light-hearted. I lost my job in August, so I’m sorry to hear you’re joining “our ranks”. Until I get a job, it’s “recovery, what recovery?” from me, too. Good luck)

  11. DrStarkweather says:

    @Eldritch:

    Totally agree, I laugh every day the DJIA goes up while the unemployment rate does too. I know the two arent necessarily correlated, but I think its all misperception that the economy is recovering

  12. hypnotik_jello says:

    @Eldritch: Every economist knows unemployment is a lagging indicator.

  13. GuidedByLemons says:

    @Eldritch: Unemployment is still rising, and obviously that’s bad, but positive GDP growth = economic recovery. This is not a “lie” by any stretch of the imagination. If GDP continues to grow, the employment picture will turn around in due course.

  14. Bargaineering.com says:

    @Eldritch: The economy is recovering, it just hasn’t fully recovered yet and it likely won’t for quite some time. The fact is that the rate of monthly job loss has fallen significantly since earlier this year. It’s by no means pretty but it’s not as ugly as it was.

  15. ecwis says:

    @DrStarkweather: Also, the unemployment rate doesn’t include the 9.3 million people who were pushed into part-time jobs from their full-time jobs. If we include those people in the unemployment rate, then it would be 17.5%.

  16. lihtox says:

    @hypnotik_jello: I think it would be fairer to say that the Dow Jones is a leading indicator, and unemployment is the actual indicator of how good the economy is. If you’ve got a lot of unemployed people, then your economy sucks, no matter how well the richest are doing.

  17. chocobo says:

    @thebigbluecheez: The economy is beginning a recovery, it’s just that the job market lags behind it.

    We’re beginning to gain some jobs, but they’re more useful/productive jobs in areas like manufacturing and sales of necessary everyday items.

    We’re still losing (and need to continue to lose) jobs that only exist in a bubble economy. First are the things like doggie hotels and real-estate flippers and home redesign consultants, those 2006 jobs that don’t need to exist anymore. Second are the companies that severely overexpanded, they need to shed off the extra weight they put on, which includes many legitimate real world jobs.

    Once we’ve knocked out the clutter of unnecessary jobs (which is mostly done by now) the rebuilding process can get moving again… we’re around the peak of unemployment right now. It’ll be a slow recovery, but it’ll happen.

  18. FormerlyAnonymous says:

    I work in an entertainment industry, and, well, business is good. Real good. I don’t really know why it is, but more people seem to have more cash to spend now than they did a few months ago. Maybe it’s just that people with jobs are less concerned about losing theirs, so they’re feeling more free to spend?

  19. lmarconi says:

    @Stephmo: Good advice though I wish you had given it in a slightly nicer tone : ) To some degree I understand that I have to apply for a new card, rather than applying to have my current card switched to a different type of card offer. It’s not exactly consumer friendly but I understand why that happens.
    However, I still have to keep my old non-rewards card open, because it’s my oldest line of credit and I’ll have to put stuff on it periodically so it isn’t closed for inactivity. Even though there’s absolutely no reason why I would ever want more than one or two credit cards, at that point, I’m stuck with three.
    I guess we’ll just leave it at my usual “the credit reporting system sucks, is designed to confuse and harm the consumer and should be changed.”

  20. eggshelld says:

    @Gadgetgirl: I don’t know about if it would affect your credit score, but I had a similar thing happen with a Banana Republic card I got, used once, paid off, and never touched again. My Equifax report lists it in the same manner it lists other credit accounts I’ve closed, even though the company, not I, closed it. Wouldn’t worry about it.

  21. Coelacanth says:

    @lihtox: I think the consensus is that stock market performance is a leading indicator. GDP is a “current” reading, and employment figures are lagging.

    The stock market began to tank well before the massive employment crisis began.

  22. korybing says:

    @Coelacanth: I didn’t know that when I tried to get my first credit card. I was just trying to find a card that would freakin’ accept me and my limited credit history, and instead I got a bunch of cards that kept declining me because I had been applying for them. How are you supposed to get the best card if the act of applying for cards hurts your chances at getting cards?