Retention Bonuses
When people ask (or usually they naively assert) about how this hobby hurts one’s credit score, there’s usually only one way that it in fact has a negative long-term affect on credit: lowering the average age of accounts – and accounts stay on your credit report for ten years. There is also a short-term affect that inquiries have on your credit score, but after a year it becomes nominal and after two years it is completely removed from your score. This is also offset by an increasing aggregate credit limit which lowers your overall utilization rate and actually increases your credit score. Case In Point: During my last application churn, U.S. Bank and AMEX both provided me with the FICO numbers they pulled from Equifax and Experian (790 & 760, respectively). This is after over 20 inquiries in the past 18 months!
Someone’s average account age will be lowered by opening an account and closing it a year later (when the annual fee is due), because that account stays on your credit report for ten years. So anytime there is a great offer for an annual-fee-free card (like the $400 back on $1,000 spend NFL card that was available last year), it’s a great idea to take advantage of the offer; however, there are many instances where an annual fee card offers benefits that outweigh the annual fee. Examples include the Chase Hyatt Visa, which gives an annual stay certificate and has an annual fee of $75. In essence, you are paying $75 for a free room night which is almost always worth at least double the annual fee. NSPfiance and I took advantage of this in Bali last fall, securing a room that routinely goes for $150+ for only the $75 annual fee.
Banks also offer retention bonuses. I just got my bills for my Citi AAdvantage Visa & AMEX cards, which had annual fees of $65 & $85. While somehow I mislabeled my spreadsheet and these fees were a surprise, I immediately called up Citi to let them know that while I liked the card, with the fact that US Airways and American were merging, I didn’t think it was necessary for me to hold both cards. Without even mentioning that I was going to cancel (which I would have), I was offered a $95 statement credit on both cards (which more than offset the annual fee) and also was given a promotion whereby I would earn bonus miles for meeting monthly spending thresholds. This netted me $40 in the black plus bonus mile opportunities. As a “thank you” to Citi, I will certainly shift some of my spend from other banks to them. The reward cycle goes full-circle – be profitable for the banks, and they will be profitable for you.
For a reminder on how your credit score is calculated, read my post: Doesn’t this KILL Your Credit Score??: