Paying price of points chase

Card holders churn accounts for free flights but loans under threat

Credit-card holders are increasingly churning accounts to capture huge sign-on bonuses of reward points for free flights and other benefits, but it can threaten their ability to get a loan and potentially damage their debt position.

Several reward credit cards offer sign-on bonuses between 100,000 and 275,000 points – enough for more than 22 flights between most capital cities. Credit reporting agency Experian said people who tried to game the system by opening new cards with no intention of being a long-term customer could hurt their credit score and turn off potential lenders.

“Although opening one new credit card isn’t necessarily bad for your credit score, there are more potential downsides to opening multiple credit cards,” Experian’s director of client advisory, Charlotte Rankin, said.

“Applying for multiple credit accounts, particularly in a short space of time, could influence your credit score.

“Even if the card issuer rejects your application, the hard inquiries will stay on your credit report for five years.”

Ms Rankin said other potential negatives of churning included: A LOWER average age of accounts could hurt credit scores; HIGH combined credit card limits could affect lending decisions; POTENTIAL late payments caused by juggling multiple cards.

“If you miss the notices and fall at least 15 days behind (payment due dates), the card issuer may report the late payment to the credit bureaus, which could significantly hurt your credit scores,” she said.

Ms Rankin said there had been increased scrutiny from lenders trying to identify consumers who were chasing signon bonuses.

Points specialist and founder of iflyflat.com.au, Steve Hui, said some credit card sign-up bonuses were hugely attractive.

“They are building an industry of people who just sign on for the points,” he said.

Mr Hui said loan applications did not solely rely on credit scores, because lenders often dug deeper into people’s spending habits. “Banks are smarter these days … but don’t go overboard,” he said.

One new card a year might be fine with banks, Mr Hui said, but “two, three or four cards a year and maybe that is starting to push the envelope”.

Always pay off card debt within its interest-free period or risk being slugged by interest rates of up to 24 per cent. “If you pay interest, you are eroding the value of your points,” Mr Hui said. Comparison website Mozo.com.au said that some card issuers were changing the rules around bonus points, including splitting the delivery of points.

“The split strategy is intended to make it harder for consumers to game the system by signing up for a credit card just to collect the bonus points,” Mozo spokeswoman Rachel Wastell said.

“With conditions around how and when points are delivered and redeemed, it’s a risky strategy to take on additional debt with multiple cards just to secure bonus points offered.”