Dangers of Credit Card Rewards

credit card

I was updating my credit card spreadsheet last night and noticed that if I did nothing to prevent it I would have to pay over $1,600 in annual fees for all of our credit cards over the course of a year.  Of course that would not happen because we get some waived and also downgrade or close cards before the renewal date, but it still got me to thinking about the possible dangers of credit card rewards from chasing free travel or cash back.

My Credit Card Situation

A not so complete list puts us at 19 different credit cards right now.  Actually only 18, since I just closed a Citi American Airlines Platinum Select account due to poor customer service.  Just to note, this is total accounts.  In some cases, we each have the same card (2 accounts) and others we have 1 account, but added an authorized user (the total is actually 31 cards when you factor that in).  For example, we each have a Chase Sapphire Preferred Visa because it has a really good sign-up bonus (that means we can each get the 40,000 point bonus).  We only have 1 Ritz Carlton card though because its annual fee is not waived and I wasn’t sure if we could use all of the travel credits to make 2 cards worth it (my wife is an authorized user on the account though, so we both have a card).  

The available credit limit is actually over $250,000.  I have so many cards with Chase that I have had to lower the limits on some older cards to add new ones recently!  I never carry a balance (except for our solar purchase at 0% last year), so I am not worried about running up a balance.  In addition, having a lot of old accounts helps keep the credit score impact low when I add new cards.

I should also note that a couple of the cards I have had since I was a teenager (and they just increase the limit over time even when I don’t use the cards at all!).  Over time they have converted to new types, but have a really old account age (good for credit scores) and no annual fees so I keep them open but never use them.  I plan to open a few less cards in 2015 than I did in 2014, but more than I did in 2013.  I think we will probably reduce down to about 12 accounts as once we get the initial bonus, there is usually not a reason for each of us to keep a card open any longer.  For example, we don’t both need the Marriott card.  We are better off earning the points all on one account.  In fact, in that example, we don’t even need the Marriott card at all any longer since the Ritz Carlton card gives the same benefits (actually slightly more with suite upgrades).  So far in 2015 I have opened 3 cards.

If that total number of accounts is shocking to you I understand.  My hobby is trying to travel for less or even free, so I consider it an investment.  Last year we earned over $5,000 in rewards and plan to earn about the same this year.  For the amount of time I spend, it is a pretty good return.  I probably spend a few minutes a week paying balances, checking points total, etc and another hour or two each month reviewing the overall plan (or sometimes applying for cards).  Suppose we earn $5,000 in 2015 and I spend a total of 3 hours per month (36 hours for the year).  That would work out to be $138 an hour (thanks Gen Y Finance Guy for making me realize I already have a side hustle!).  

While not all of the earnings are able to be turned into cash, it still represents cost savings most of the time.  For example, we can use points to travel to the Midwest to visit family or to extend a work trip for another night at no cost to us.  It lets us enjoy more down time without having to budget a large vacation line item each month.  I also have the ability to almost instantly turn about 140,000 Chase Ultimate Reward Points into $1,400 in cash.  That is almost like an emergency fund, right?  It will be 190,000 or $1,900 in a little over a month when we get the next bonus.    Since those points can be transferred to several programs, I like having them sitting there ready to be deployed when needed.  The chance of them being devalued is less since I know they are always worth at least $.01 each from Chase.

As a side note, I will actually pay a few annual fees later this year.  I want to keep the Chase Sapphire card so that I can move my points around and the annual free night on the Marriott Rewards card offsets the annual fee each year.  

Back to the Point

So moving on to the frightening headline of the post I think everyone should take a few minutes to consider what chasing travel/reward points could cost you.  Its more than a little time because you are affecting your credit score and potentially risking money at times in the form of annual fees, finance charges, etc.  Since all anyone ever talks about is how awesome credit card hacking is (including myself), I have put together a list of some things to think about on the negative side.

Danger Zone List

  • Tracking and time allocation
    • You must stay organized to prevent late fees and finance charges.
    • You need to track limits, authorized users, perks, special bonuses that can expire quickly, and terms like blackout dates, etc.
    • You must also make sure to track account opening dates to keep organized for the next item around credit scores.
    • Tracking the required spend is also critical.
  • Credit Score impact
    • Opening new cards has a short term impact on your account that usually dissipates in a few months.
    • My score is over 800, but if I open to much to fast it could drop.
  • Excess or Increased Spending
    • Trying to ethically reach the spending requirements for bonuses takes some planning and juggling.  You may be tempted to buy more to get there faster.  This must be avoided!  Otherwise you are just pre-spending your bonus.
  • Annual Fees
    • Be sure to watch out for these, some cards do not waive it in the first year and you should factor that in to make sure you come out ahead before you get the card
    • If the annual fee is high enough and you don’t use some of the perks the reward may end up not being worth it or only a marginal benefit.  Pick a card with a better return instead.
  • Losing points to expiration
    • Some cards like the Barclays World Arrival Plus MasterCard don’t let you transfer points.  They have some great attributes, but if you close the account you can lose the points (you may want to just downgrade to the no fee version if you can’t use them up before the annual fee is due).
    • You can also lose points if your account goes long enough without activity.  This is usually somewhere between 12 and 24 months.  There can be a cost to keep them, so factor that in, too.
    • Marriott just announced an expiration on points with no activity.  Click on the link to see the Million Miles Secret post about it.
  • Risk of losing a card and not noticing until fraud has occurred
    • With so many cards and high limits, it is a risk if you lose your wallet or forget a card at a restaurant

A final warning: if you are buying a house, car, or other large purchase in the next 6 months be careful about adding multiple cards right now.  I space mine out every 3 months or so and we open less for my wife since I have the higher credit score.  (Her score has actually increased dramatically in the last year, despite us opening several cards in her name.)

More Travel Resources

If you want to read more about how to use credit card rewards, check out The Points Guy and Million Mile Secrets.  Both sites are full of how to maximize your rewards, strategies to use, and information about the latest program changes and sign-up bonuses.

Another site, Richmond Savers, has a ton of information for those jsut starting out and the also give some examples of their trips and how they achieved tons of travel for a very low cost!

Anyone have some perspective to add?  Do you think this is too much?