Yesterday, we published a post about how to achieve a perfect 850 credit score. If you want to improve your credit score in the long term, you should apply for more cards when you're young to lay the foundation for your credit.
How often should you apply for a new credit card?
My rationale is to only apply for credit cards based on my ability to hit the minimum spend requirement to get the signup bonus. For me, this means that I apply for a new card every 3-4 months. I mainly choose cards based on my travel plans.
In the past, I talked about how I meet minimum spend through paying rent. San Francisco is one of the most expensive cities to live in, and I can usually hit the minimum spend by paying rent for two months.
I emphasize the signup bonuses over cash back earning potential because the signup bonus is usually a higher number. For example, if you earn 3% back on dining and spend $1,000 on dining a year, that's only $30. Hopefully, the signup bonus is worth more than $30.
A lot of it also depends on how much you value free travel and experiences. I know some people who make a ton of money and don't care about free travel. On the other hand, there are people who have lower salaries and value free travel.
When signing up for a credit card, I look at:
- Signup bonus relative to alternatives and historical numbers
- Long-term value of the card or product change/downgrade paths
I keep an eye out for higher than normal offers before applying for a credit card. An extra 30,000 points may seem immaterial, but even if you had a great cash back card, it would take a lot of spending to earn 30,000 points.
Regarding of long-term value, there are two things to consider:
- is it a viable option to keep long-term?'
- is there a downgrade path?
The whole point of this exercise is to make sure you're getting positive expected value from your credit cards, which means that you're getting more value than the annual fee.
Some good examples of no annual fee cards are the Citi Double Cash card, Chase Freedom, and the Discover It card. The Chase Freedom and the Discover card help you earn 5% back on certain categories each quarter. The Citi Double cash helps you earn 2% back on purchases.
Examples of bad no annual fee cards are ones that earn less than 2% cash back because of the Citi Double Cash.
Annual fee cards:
1. Keeper cards (free perk not contingent on spend): There is an annual fee, but the benefits you receive outweigh the fee. An example of a keeper card is the Chase IHG card. It has a $49 annual fee, but you receive a free anniversary night each year. Most hotels cost more than $49/night. The Chase Hyatt and Marriott cards also offer similar perks.
2. Spend-based cards (come out ahead after spending $x): The Chase Sapphire Reserve and the Amex Platinum fall into this category. Be sure you're breaking even or coming out ahead of the annual fee.
i.e., Chase Sapphire Reserve Breakeven
(simplified since you can add other variables like Priority Pass)
= $300 travel credit - $450 annual fee - 0.02(x) opp cost
+ 0.03(cpp)(x) CSR multiplier
x = spend on dining and travel
cpp = cents per point (how you value your Chase points) = 1.5
solve for x:
- 0.02x + 0.03(1.5)(x) = $150
0.025x = $150
x = $6,000 on dining/travel to breakeven for AF and opp cost
3. Intangible benefits (high variable perks): Cards that offer perks that have intangible value. An example of this is the Amex Platinum card — it gives you automatic status match at certain hotel groups. The Amex Centurion Lounge is also another intangible value that's hard to put a price on. For some people, this may or may not benefit them based on how often they travel and the home airport.
Whether you keep a card depends on how you quantify each of these benefits; positive expected value can be highly subjective.
Cards with an annual fee and downgrade path
Cards that have an annual fee, but there is a product change option. An example of this is the Citi Prestige card. You can product change any Citi card to a Citi Double Cash card. The benefit of doing a product change is that it keeps your credit profile alive.
Another example is the Chase Sapphire Reserve. You can downgrade the Chase Sapphire Reserve to a Chase Freedom or Chase Freedom Unlimited.
The only exception is Wells Fargo. They close the "old" credit card, and they open a "new" card. This adds a "new account" on your credit report which is bad.
Tying it all together, I apply for cards based on my ability to hit the minimum spend requirements. I look for higher than usual sign up bonuses and ideally, ones with a downgrade path.
I don't cancel my credit cards because I'm still trying to build the foundation for my credit score. The main reason why you want to product change your account, and not close, it is because it can stay on your credit history for 7-10 years.
Total accounts count both open and closed accounts. What most people don't realize is that closed accounts fall off your credit history after 7-10 years.
Situation 1: Closing
Open two cards in Year 1
Close 1 of the cards in Year 2 (which falls off in Year 8)
In Year 10, if you apply for a new card:
Average age of accounts = (10 + 0) / 2 = 5
Situation 2: Not Closing
Open two cards in Year 1 and keep both open
In Year 10, if you apply for a new card:
Average age of accounts = (10 + 10 + 0) / 3 = 6.7
There's not a concrete answer on how often you should apply for a new credit card because it depends on your spending habits and goals. The main takeaway is to find credit cards that fit your lifestyle.
How often do you apply for credit cards?