My two dozen credit cards, my points, and me
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Between my wife and me, we have somewhere around two dozen open credit cards. I’m sure that for some, the thought of having that many credit cards causes high blood pressure and anxiety spiraling. However, I have a stack of credit cards that sit in a desk drawer collecting dust that I simply don’t worry about. Every now and again, I’ll pull a particular card out and use it, but generally most of them just sit in the drawer. I do it all for those sweet, sweet credit card points.
Credit cards are tools, but credit card debt is no joke
It’s important to be clear that I don’t think anybody should be flippant about opening credit cards, and I believe that credit cards are an extremely dangerous financial tool when misused. Credit card interest rates are outrageously high. Even if you have excellent credit, average credit card interest rates are in the 13% range. That’s nuts. For every $100 you put on a credit card, don’t pay off, you’re charged $13 per year. By comparison, the average mortgage rate right now is around 3.25% and average student loan interest rates (federally-provided, not privately-funded) are in the 3-5% range. Even personal loans, which usually have pretty high interest rates, are in the 6-8% range from a lot of the top lenders. Holding credit card debt (and paying interest on it) is the absolute quickest way to financially screw yourself.
However, it’s important to highlight that credit cards can also be an incredibly useful financial tool. They are a perfect means to buy something now, and pay for it later. However, in almost every circumstance, I only put purchases on a credit card that I already have funded in my budget, and that I will be paying off well before a credit card company ever has an opportunity to charge me interest.
The only circumstances under which I will use a credit card to purchase something, and not pay it off within the same month, is if I have it on a 0% interest card. In the cases where I’m using a 0% interest card, I usually have a very specific large purchase in mind that I don’t have fully funded right now, but that I have high confidence I can save up enough money to cover by the time the 0% interest rate runs out (it’s pretty rare that I’ll make a purchase on a 0% rate with less than a 12-month term).
Credit card points are lucrative
The reason I have so many damn credit cards is that their points are so damn lucrative, and they give you a lot of them for signing up for a new credit card. Let me offer an example:
The Chase Sapphire Reserve credit card is, in my mind, the best travel card out there. It gives you 3 Ultimate Rewards (Chase points currency) points per dollar you spend on travel, dining, and right now is offering some special time/spend-bound offers around grocery purchases at the moment (the pandemic has forced a lot of card issuers to find more attractive offers with the lack of travel happening). However, when you sign up, you also get an extra 50,000 points if you spend $4,000 on the credit card in the first three months.
Those 50,000 points (and similar sign-up bonuses on other cards) are where the bulk of the money is made off of credit cards. Let’s say, for example, that I sign up for the Reserve card, and spend $4,000 on groceries and dining out in those three months. I’ll net 12,000 points (because 3 points per dollar in those categories of spending), and then 50,000 points from the sign-up bonus. The 62,000 points I now have can be used in a lot of different ways, but the Reserve has a couple particularly lucrative methods of utilizing points: spending on travel, and a Pay Yourself Back program. If you buy flights or hotels with the points, you get a 1.5 cents/point redemption rate. Similarly, if you use the Pay Yourself Back program, which allows you to reimburse grocery and dining expenses at the same 1.5 cents/point rate, those 62,000 points are actually worth $930 in cash back. So I can make nearly $1,000 just by maintaining my normal spending patterns and adjusting the credit card that I use to spend money.
It’s not all free, though, as the Chase Sapphire Reserve has a $550 annual fee, but even if I just take the $930 and call it a day, I’ve made $380 for doing pretty much the same thing I would have normally done with another credit card. However, the CSR has a bunch of other perks: there is a $300 travel reimbursement (which is automatic) annually, a $60 DoorDash credit, and Chase credit cards also get rotating offers from vendors (in particular there are frequently 10-20% off offers on services that we use, like Sun Basket). So even though there’s a really high annual fee, it’s pretty easy to still get a good return on it.
2020 actually provided a really interesting opportunity for me to understand my own personal credit card habit. Under normal circumstances, I tended to go after a lot of travel-oriented points (Marriott and Southwest are some of my favorite programs, for a variety of reasons). However, during the pandemic, I was suddenly very uninterested in travel points, and so I shifted my focus heavily towards cash-back. Credit card companies also took note of this shift in consumer spending, and all of the major credit card companies also shifted their rewards towards cash-back, and the things that people were spending on (groceries, for example).
It’s often hard to really track the value of your redemptions when it’s coming through airline tickets and hotel stays (it can be done, but I’m pretty lazy about it), but cash-back redemptions are very easy, because I see them hit my accounts, and use budget tooling that makes it very easy for me to report on. I also didn’t open a particularly large number of credit cards in 2020 (not none, but it was a very light year for me in the scheme of things). In 2020, we netted about $6000 of reward-based “income”, through points redemptions and cash-back/statement credit offers. That’s after the annual fees that I paid, and since this isn’t taxed, that’s bordering on an extra $9000 in effective income for the year.
Understanding how credit cards can be played off of each other accelerates earnings
I’ve had a Chase Sapphire Reserve (CSR) for a number of years, and while I didn’t get a sign-up bonus in 2020, I netted more than $4,000 in statement credits from cash-back offers on my CSR, after the annual fee was applied. With that said, the $4,000 didn’t come primarily from purchases made on my CSR. Between my wife and me, we have seven Chase cards that give Ultimate Rewards points for spending. The reason we have so many is that we can each get the same cards to get sign-up bonuses, but then different types of cards give different rewards. Some concrete examples:
Chase Sapphire Reserve: $550 annual fee, 3x points on travel and dining, and a $300 annual travel reimbursement
Chase Freedom: $0 annual fee, 5x points on rotating categories quarterly
Chase Freedom Unlimited: $0 annual fee, 1.5x points per $1 spent on anything
Chase Ink Business Cash: $0 annual fee, 5x points on cable, internet, and phone
The Chase Freedom Unlimited has a sign-up bonus right now that gives 5x points on the first $12,000 spent on groceries in the first year. It doesn’t have an annual fee, so we can get it for free. If we spend $12,000 on groceries, we’ll end up receiving 60,000 points. If I were to use the Pay Yourself Back option on the Chase Freedom Unlimited, I’d get 1 cent/point, and get $600 back. However, Ultimate Rewards points can be moved between cards, so if I move the 60,000 points over to my CSR, I can actually get $900 back. Granted, I still have to pay the $550 fee, but with the $300 annual travel credit on the CSR, I’m really only paying $250, so I make $650 if I hold both cards, instead of just $600 if I use the one.
My wife and I also run an Airbnb out of one of the floors of our house, so we have business expenses, and thus, are eligible for business cards as well. The Chase Ink Business Cash gets us 5x points on our Verizon bill, as well as our Comcast bill, and I can make those points worth 7.5 cents/dollar spent between the 5x and Pay Yourself Back using the Sapphire Reserve. At about $100/month, our Comcast bill produces about $90 of cash-back per year, simply by putting it on the Chase Ink Business Cash card, getting 5x points on the bill, and then moving those points to a CSR for the 1.5x cash-back return via the Pay Yourself Back program. It all ends up adding up, and we’re really not doing anything more than our usual spending. I don’t make any serious efforts to spend money that I wasn’t already going to spend, but I figure if I can make money while I’m doing it, I might as well make that effort.
But your credit score!!
I think a lot of people get stressed out by the idea of opening credit cards because they’re afraid it’ll impact their credit score. And you know what? It does. But the impacts are actually a lot less meaningful than you think, and they even out a lot over time.
I definitely recommend signing up for Credit Karma or some other free credit reporting service, because it’s really helpful to know how what actually impacts your credit score. If you take what Credit Karma tells you at face value, the biggest factors to your credit score are (in order):
Payment history (high impact)
Credit card utilization (high impact)
Derogatory marks (high impact)
Average age of your accounts (medium impact)
Total accounts (low impact)
Hard inquiries (low impact)
Opening a new account affects four of these categories: utilization, average age, total accounts, and hard inquiries. Only one of those, however, has a high impact on your credit score (utilization), and the more available credit you have, the less it actually impacts the overall percentage. And also, if you assume lower utilization is better (which is what Credit Karma communicates), then opening a new credit card actually forces your utilization lower (since you’re increasing the denominator in the credit used / credit available calculation).
So, opening a new credit card should actually have a positive impact on the high impact factor, and negative impacts on average age, total accounts, and hard inquiries. But since most of those are low impact, it shouldn’t really affect your score that much. Usually when I’ve opened a new account, I’ll see a 10-15 point decrease, but it always bounces back within a month or two. One of the other tricks here is that most credit card companies don’t tie business credit accounts to your personal credit score, so opening a business card account won’t impact any of these factors (this isn’t universally true, and Capital One is a notable exception to this rule)
But the annual fees!!!
Annual fees are a very legitimate concern, and something that I manage very closely. I keep extremely close track of when I open credit cards (I have a spreadsheet I use to remind myself of the fee, and the date when I expect that fee to hit my account). I paid a bit over $2,000 in annual fees in 2020, which is a fairly outrageous amount, if you don’t consider that my credit card points income was closer to $8,000 in 2020. Regardless, annual fees are real money, for an increasing number of high-end credit cards, they are very expensive (the Amex Platinum and Chase Sapphire Reserve both have $550 annual fees, and represent the highest annual fees that you’ll generally see on consumer-grade credit cards).
When I sign up for a credit card, I usually expect to get hit with one annual fee, which I consider to be the cost of the sign-up bonus, but I will typically plan to close, or more often downgrade the card before I have to pay another fee. In the case of all of the Chase cards that issue Ultimate Rewards, for example, after you’ve held the card for a year, you can request a product change to a different card. You won’t be eligible for a new sign-up bonus through a product change, but I can easily convert to a card that has no annual fee in year two. I have certain cards (the Chase Sapphire Reserve and the Amex Platinum, for example), which I choose to continue paying for, because I know I can use them to amplify my earnings in other ways. The rest, I’ll convert to a no-annual-fee card and stick it in a drawer for the rest of time, or if I can’t convert to a no-annual-fee card, I’ll close the account. It’s also worth noting that when you call to close an account, sometimes credit card companies will offer retention bonuses depending on how much they want to keep your business, and I’ll make a point-in-time call on whether or not I want what they’re offering.
The reason I always prefer to convert to a $0 fee card is that it evens out the average age of accounts, which we know has a medium impact on a credit score. Most credit card issuers will eventually close inactive accounts, but it typically takes seven years or so for them to do that. If I have 10 accounts, with ages ranging from one to seven years, and I add another account, it’s going to have much less of an impact on my average account age than if I constantly close accounts after a year. In this way, my hobby of holding dozens of credit cards actually reinforces the stability of my credit score.
Credit cards aren’t scary with the right visibility and process
I’m kind of on the casual end of obsessive about credit card points. There are way more extreme versions of what I do. If you dig in, you’ll start to see terminology like manufactured spending (which incidentally I generally avoid because it can look a lot like money laundering to the authorities). It’s also really easy to find stories of people who spend hours and hours poring over airline search engines to identify the optimal places to move points around to get the best redemption rates (I did manage to pay for most of my Greek islands honeymoon with points, and had round-trip first-class tickets booked to Japan on points, which unfortunately got canceled due to the pandemic). What I’m doing to generate my returns doesn’t actually require a lot of time, but it does require some organization. Before jumping in, I’d recommend following these tips:
Get organized, and make sure you track opened/closed/downgraded cards: I have a spreadsheet that I periodically consult to determine if I’m getting near a time when I need to call a credit card company to downgrade or cancel a card. Mostly I’m tracking cards, dates opened, downgraded, or closed, and I also actually keep a history of all cards that I’ve closed. That can get important if I ever want to reopen a card and get another bonus (often you have to wait 24-48 months before you can open a card and get another bonus if you’ve had it previously).
Centralize your visibility of all of the transactions: I use a budgeting tool (You Need a Budget), which automatically imports all of my credit card transactions (Mint also does this, as do a lot of other apps and budgeting tools out there), and I look at this daily (and often multiple times a day). By automating my transaction import, I will always know, inside of a couple days, when an annual fee has hit my account. I also think the transaction visibility is important because, as it turns out, credit card fraud is a thing (I’ve probably had to get 5-7 credit cards replaced due to fraudulent transactions -- once I had a card compromised even before I had the physical card...hilarious).
Don’t push anything on a credit card that you can’t pay for in cash, and pay your balances down to $0 often: The absolute worst thing you can do for your credit is miss a payment or run a balance. If you can’t afford to keep your credit card balances at $0 at the end of every month, a credit card is only going to screw you over. When you’ve got a lot of credit cards in use, this becomes a legitimate risk (though credit card companies usually give you a grace period before they report a missed payment to the reporting agencies). I generally pay credit cards down a few times a month, usually once the balance on a card gets over $200 or $300 (though there’s no rhyme or reason to that, and sometimes I pay it off when the balance is less than $10, if I happen to be on the bank’s website), so that I never end up missing a payment accidentally.
Through all of this, I’m making several thousand dollars in an average year between cash-back and travel/vacation redemptions, and none of that income gets taxed. Best of all, my anal retentiveness has resulted in a credit score north of 800. It’s all about the mindset, applying a light process, and recognizing that credit cards are meant to be used as a tool, not as a crutch.