When Loyalty Cards Are BAD for You

You know how I feel about debt. But I don't have anything against credit that's used smartly. And one of the smartest things you can do is have a credit card that you pay off in full every month AND earn points or cash back. But can too many loyalty cards be too much of a good thing? You betcha.

There you are standing in line in the big ol' department store. You arrive at the check-out with your arms full of stuff and the cashier says, "If you apply for our card today, you'll get a 10% discount." You've been adding it up in your head. That's about a $30 savings for doing nothing more than getting the card. Hey, how can that be wrong? You'll just cancel the card once you've paid it off and you're in the clear.

Here are a few things you should know:

1.  Not all credit cards follow the same rules. There are department store credit cards like the HBC MasterCard that do not actually cancel the account when they say they do even if you ask them to close the account or report the card lost. That leaves the account open to fraud. No discount is worth the risk! And since it's virtually impossible to get a body on the phone to solve a problem with some card companies, you'll be left in purgatory wondering what you can possibly do to solve the problem you created when you went for the quick discount!

2. The more cards you apply for, the worse your credit score can become. That's because very time a lender requests a credit score, an "inquiry" is placed on your credit report. Too many inquiries — usually more than two in a year — is often associated with higher rates of default.

3. Closing credit card accounts can also negatively affect your credit report. Close a card with a positive history and the record of your good behavior will disappear. But negative credit reports stick around for six years whether or not you cancel the account, so you could be left with a credit report full of bruises.

The total amount of available credit can also affect your future ability to borrow, even if you don't use the cards. Lenders look at the total amount of credit you have available. So if you have five cards each with a $2,000 limit, they see that as you having borrowed $10,000. Never mind that the balances on those cards are zero! Since you could use those cards (or lines of credit) at any time for any reason, they have to count that credit as already used, and that'll limit how much more you can borrow.

If you're finding the lure of rewards cards irresistible, be very careful. There are heaps of fools who get hooked by generous sign-up bonuses or the hunt to accumulate points. Some folks get so obsessed with their points that they completely lose sight of their growing debt. One or two cards mean you can keep track of what's happening. Multiple cards offering multiple rewards, or department store cards with special bonuses, means you may end up with balances that start out small and accumulate quickly. The interest you end up paying more than negates the points or discounts you got in the first place. (How do you think they can afford to offer all those discounts?)

Remember, too, that the STUPID credit score system takes into account the total amount of money spent on each card, versus the available credit, regardless of whether you pay off your balance in full each month. (Have I mentioned recently just what a piece of crap the credit scoring system is?)

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