Credit card rewards: free flights by the dozen, but know the traps

Reward point offers are multiplying among credit cards, and consumers are being warned to understand the potential traps.

Frequent flyers can do well if they know the rules. Picture: NCA NewsWire/Tertius Pickard

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 currently 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,” said Experian’s director of client advisory, Charlotte Rankin.

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

“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 impact 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 sign-on 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, as lenders often dug deeper into peoples’ 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.

He said there were many strategies beyond sign-on bonuses to collect points, including switching energy providers and buying fuel.

Comparison website Mozo.com.au said 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,” said Mozo spokeswoman Rachel Wastell.

“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,” she said.

“Applying for more than one credit card at once is risky as there’s a potential for overspending and debt accumulation. Many find it difficult to keep on top of the complex repayment dates and conditions for one card, let alone multiple.

“Multiple credit card applications can also impact a borrowers’ ability to get credit in the future.”

Originally published as Credit card rewards: free flights by the dozen, but know the traps