Editorial Policy

Will Chasing Bonuses Hurt Mortgage Chances?

Eva Norlyk Smith Ph.D.

June 17, 2013

QHi Eva,

My wife has a plan I'm not sure about. She wants to sign up for a few credit cards that give miles bonuses for signing up. But I've heard that looks bad from a lender's standpoint, and we want to get a new house within the next two years. How long would lenders be able to see the credit harm that comes from opening several cards really quickly? And would we be safe in about a year when we start house hunting? Also, are there any other risks involved in opening up a few cards pretty much all at the same time? — Pierre
ADear Pierre,

Your wife isn't the first to be tempted by rewards credit cards with generous sign-up bonus offers. It's an appealing proposition: If one sign-up bonus is good, more are even better, right?Ask Eva

However, you're right to be cautious, particularly because you will be applying for a mortgage within the next couple years. Here are some of the questions you and your wife need to consider.

1. How will this affect our credit scores?

It is correct that multiple credit applications within a short period of time can hurt a person's credit score. One component of FICO scores looks at new credit accounts (including the number of recent credit inquiries). The idea is that opening many accounts within a short period of time may indicate that a person is in financial distress.

That being said, new credit is not a big component of credit scores; it counts toward 10 percent of your FICO score. Exactly how many points opening new credit cards will deduct from your score depends on how your credit is to begin with. People with a long credit history typically see only a few-point dip from applying for a credit card (even multiple cards at a time). But according to FICO, opening several credit accounts within a short period of time represents a greater risk for people who don't have a long credit history. Multiple new credit cards will also lower the average length of your credit history, which accounts for another 15 percent of your score.

The effect of new credit accounts abates over time, and your score would likely recover within a year or two. But credit scoring is a complex mix of factors playing into each other, so there is no guarantee.

2. What are the costs?

Secondly, weigh the temptation of easy money against the costs of the downside. Yes, you may be able to pocket some free miles. But just how much could it cost you if this little gamble were to lower your credit score?

You can use this mortgage rate estimator from FICO to get a sense of how much a lower credit score would cost you in increased interest charges over the life of your mortgage. Pull your FICO score first for about $20 from myFICO.com (or estimate it using this FICO score estimator), and then see if your credit score falls in a borderline area. But if you are close to the cut-off point, there is reason to be cautious.

And of course, if you're not in the excellent credit range at all, you shouldn't be messing with applying for new rewards credit cards, but focusing on improving your credit score. If you run the numbers, you'll see that the savings in interest costs will more than outweigh the easy bonus money.

There's often another cost involved when it comes to sign-up bonuses: minimum spending requirements. These refer to the amount you have to spend on the card in a certain amount of time (generally within the first three months after opening the card) before the issuer will give you the bonus. If you aren't able to meet your spending requirement without spending extra, or if you won't be able to pay off the balance in full before interest charges kick in, the sign-up bonus will probably hurt more than it will help.

3. What's the value of peace of mind?

Consider the psychological cost of having to worry about your credit scores and the distress you'd feel if you end up with a higher mortgage rate. You might find that peace of mind is ultimately worth a lot more than pocketing a few hundred dollars extra in credit card sign-up bonuses.

However, if your wife is eyeing a particularly enticing sign-up bonus, and you will actually be able to use it (and get it without upping your spending), you can probably go for it without worrying too much about ruining your chance at a good mortgage rate more than a year from now. Just be sure to use the new card regularly and pay it off in full each month so that it helps to raise your credit score in addition to raising your rewards earnings.

Got a question for Eva? Send her an email.