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There are a lot of cards with very tempting bonuses and rewards which include the first year annual fee waived.

The thing is, I want to take advantage of the specific benefits and then bail out when the time comes where I have to pay for the fees.

Is there any catch to this? Damage to my credit score? Bank not letting me apply for a second card? Anything at all?

  • 1
    There is always the risk that your balance will be too high to pay off at the end of the year. – StrongBad Mar 27 '15 at 15:49
8

A few things.

tl;dr yes it would hurt your score, depending on your current status

  1. It will affect your "Average Age of Accounts". This has a medium impact on your credit score. If you have a bunch of new accounts on your credit it will reduce your score. Ideally what you want is good long term cards that you don't plan on canceling. The upper brackets of age for an account is 20 years, that's a long time.

  2. If you repeat this process you'll have a lot of inquiries on your report. When a lender goes to check your report and sees a bunch of inquiries they might think you're trying to rack up a bunch of debt. While inquiries stay on your account for 2 years they do only affect your credit for 1 year.

  3. Utilization could also be affected. This is your total debt balance / available revolving credit. If you have $10,000 in available credit through 5 credit cards combined and a $3,000 balance combined you are at 30% utilization. The sweet spot is no more than 30%. Utilization is often the most misunderstood. It has no memory. By that I mean if you had 100% utilization last month and you knock down all of your balances to $0 the next time you pull your report after all of the lenders have reported it'll be 0% and last month's 100% will be gone, forever. Another important note is that even if you pay off your balance in full, when you get your statement balance that is what is reported to the credit bureaus. Lets say you have a card with a $1,000 limit and you get a statement for $900. Even if you pay it off in full its going to report as $900.

If you're trying to maximize your rewards you're better off finding cards you want in the long term. Even with annual fees you can generally get more rewards than the fee.

  • 1
    Utilization is awesome, you can swing your credit score over 200 points in a month if you know what you are doing. Decide you want the best interest rates, drop your utilization near zero. Apply for more credit and get all the perks and boost your utilization way back up. – CQM Mar 27 '15 at 15:01
  • What @CQM said is very true. If you're about to apply for a loan make sure you pay off all of your balances --before-- your statements come in that way it'll show as a low utilization. This will give a large boost to your credit score and get you better rates. – Chad Moran Mar 27 '15 at 15:03
10

Yes, the catch is that you'll probably forget to cancel. That's what they're relying on. In particular, check how you can cancel -- you may be required to give them notice of between 29 days 23 hours 59 minutes 55 seconds and 30 days 5 seconds.

  • I hope you're exaggerating about the last part? – Mehrdad Mar 28 '15 at 8:03
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    Yes, I'm exaggerating. But the cancellation process may well be more difficult than it should be, and much harder than the signing-up process. – Mike Scott Mar 28 '15 at 11:32
4

The risk is this can hurt your credit.

  • By canceling the card, you hurt your utilization ratio. Used credit stays the same, available credit goes down, so you are using more of your credit. As long as you are only using at most 30% of your credit you should be fine.

  • If there are a lot of closed revolving credit accounts in your history, that may be a warning to potential creditors. While it is a good thing to pay off and close your fixed mortgage or car loan, churn in your revolving accounts could be a negative indicator.

My personal anecdote was a few years back when my credit was barely hanging on by a thread. I closed an account I had paid off and could not get another credit card for at least six months. My credit utilization was too high because I lost that unused credit, and I had two accounts closed about six months apart. I was turned down specifically because of my debt load and too many closed credit cards.

2

I've been doing this regularly for years, and my credit score stays way above 750 at all times, but there's a trick that I use. I do this often so that I can take advantage of bonus sign up offers (eg. get 40,000 miles for spending 2000$ in 2 months). Here's the trick : The credit card will usually be associated with a bank, for example, Chase Sapphire is from... Chase. What you need to do is get another card from the same bank that doesn't have any annual fee - in my example, that'll be Chase Freedom. When you close the account that has the annual fee, ask the bank to transfer your credit line to the card that does not have the annual fee. Therefore, your total credit line doesn't decrease.

In summary, yes, your score will go down, but the above trick will minimize the impact, and well be worth it financially if you're doing this to get bonus miles.

1

Without knowing the specifics of which credit card you are referring to, I can only provide you a general answer. Chase Sapphire Preferred, CitiBank, AmEx SPG, etc?

Is there any catch to this?

There's no catch. You're not the first one and not the last one to do this. Go on FlyerTalk and you'll see a community of people doing this very thing. You'll get anecdotes about how credit card companies handle what you do. The range runs from abusers (like yourself) to actual credit card users. If the first year is free, then you can cancel on day 364 and you will be fine.

Damage in my credit score?

Why do you word this as "damage"? Your credit score is just a number. It is constantly changing based on your reported credit activity.

Bank not letting me apply for a second card?

If for example, you spend the required minimum only then never utilize the card, then cancel after 9 months... you may be flagged and denied the same credit card when you are eligible to apply again (after 18-24 months).

0

Canceling a credit card might hurt your credit score as @SnowMan said. Credit utilization ratio or balance-to-limit ratio have a good impact on your credit score and is often considered by many creditors while making a decision on new credit applications.

Also, frequent credit line openings and account closures can raise suspect on your credit report. If you want to cancel a credit card, make sure you have Zero credit in your credit report, which is next to impossible to average American.

At the time you close your account, if you have other credit cards with balance or a car loan, it will push your credit utilization rate higher and might hurt your credit score.

Alternative is that you can always downgrade the Credit Card you are trying to cancel to a type of credit card with no Annual Fees. If the bank doesn't offers a credit card of same type without a fee, you can ask the bank to convert it to another type of credit card without any fees.

For example, let's say you got a Amex Blue Cash Preferred credit card with an annual fees of $99 / year. But at the end of year one if you don't want to pay the annual fees, you can always call the bank to downgrade it to a normal Amex Blue Cash credit card without any annual fees.

Or you can convert that into an another type of Amex credit card which do not have any fees.

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