Playing the App-O-Rama Game: Worth the Risk?
By Eva Norlyk Smith, Ph.D.
November 8, 2011
Back in the glory days of credit, before the financial crisis struck, savvy consumers with top-of-the-rung credit scores discovered the closest thing to a free lunch: Frequent 0 APR balance transfers.
The strategy worked like this: Take out a no-fee balance transfer with a promotional 0 percent interest rate and invest the money in a high-yield savings account that pays 3 to 5 percent interest. Then pay off the balance transfer at the end of the promotional period with the money from the savings account and pocket the accumulated interest. Rinse, repeat and watch your profits grow.
Thus, the so-called App-O-Rama was born. A term originally coined in personal finance forums, such as FatWallet.com, App-O-Ramas refer to credit card application sprees in which consumers apply for numerous credit cards within a short period of time and profit from the deals.
The practice was once lucrative for many. But when lending standards tightened following the 2008 financial crisis and interest rates for savings accounts plummeted, App-O-Ramas became a dying breed.
However, the App-O-Ramas (AOR) of yore may be staging a comeback, say experts, albeit in a new and altered form. A new generation of AOR-aficionados are targeting rewards credit card bonus sign-up offers, rather than 0 APR balance transfers.
Take, for example, blogger Daraius Dubash of MillionMileSecrets.com, who, in one App-O-Rama, applied for six credit cards in one sitting and netted 305,000 bonus miles and points. At an estimated redemption value of one cent per mile or point, that’s the equivalent of about $3,000 dollars in free rewards travel. Not bad for a few mouse clicks.
Dubash’s sign-up bonuses included a 75,000 miles bonus for the Citi Aadvantage Card, a 40,000 miles bonus for the Bank of America Alaska Air Visa and a 50,000 miles bonus for the Chase Southwest Airlines Visa card, among others.
Playing the App-O-Rama game
So how do the pros plan their App-O-Ramas? And what are the pitfalls? (Surely, card issuers don’t just sit by idly while consumers pocket millions of bonus miles.)
According to the AOR pros, if you know how to play the game right, there are plenty of upsides and few potential downsides. Dubash, for example, says that he applies for as many as four to five cards every three months, prioritizing the cards with the highest bonuses or limited-time offers. He also looks for cards with minimum spending requirements that are realistic for him to manage.
Of course, the best credit card offers and sign-up bonuses are only available to those with excellent credit. And so, because he applies for credit cards often, Dubash tries to minimize the impact on his credit score by applying for credit cards from different banks.
“Banks usually request a copy of your credit bureau from at least one (sometimes more) of the three main credit bureaus Equifax, Experian, and TransUnion,” says Dubash. “The exact credit bureau used depends on where you live and which bank you’ve applied for credit from.”
By rotating credit inquiries between different banks, Dubash explains, he can limit the number of inquiries to each of the credit bureaus. So, for example, if Bank of America pulls his credit report from Equifax, and Chase uses his Experian credit report, the impact to his credit score is less than if he applied to two banks that pulled the credit report from the same rating agency.
Using this system of rotating credit inquiries, Dubash says he succeeded in minimizing the impact on his credit score from his most recent six applications to just 11 points — from 749 before the applications to 738 after he was done.
The downside of credit card application sprees
Applying for multiple credit cards is not bad, in itself, say experts. In fact, they point out, having multiple credit cards is usually considered to be an advantage.
“If you can open new credit cards without being tempted to overspend, in the long run that is a positive for your credit,” says Maxine Sweet, Vice President of Public Education at Experian. “Scoring models add all of the revolving accounts together, so the combined credit utilization will tend to be lower if you have multiple credit card accounts.”
But there are downsides to this approach, even for the savviest consumers. Experts warn that going on a credit card application spree could have unexpected consequences.
“It’s a little bit like playing with fire,” says Experian’s Sweet. “As long you don’t need new credit and don’t have to worry about a few points off your score, it may be okay. However, I would proceed with caution.”
Here are the main potential pitfalls of going on a credit card application spree:
- It’s easy to spend more than you save. Don’t apply for multiple credit cards if you are unable to pay the balance off in full each month, says Dubash. The interest costs will quickly eat up any potential rewards earnings. And, of course, if having credit available is a temptation to spend more, you could end up losing out big time.
- Your credit score will get dinged. Each time you apply for a new credit card, your credit score takes a three to eight point hit (depending on credit scoring models and other factors in your credit report). Also, banks look at recent credit applications when evaluating big loans. So if you’re planning a major loan application such as a mortgage, your main focus should be to improve your credit score to make sure you get the best possible rates. Otherwise, a little App-O-Rama adventure could quickly lead to higher loan costs and cost you several times the amount saved.
- Card issuers could flag your accounts for adverse actions. Perhaps the greatest potential pitfall of App-O-Ramas is that card issuers could take notice and flag your account for adverse actions, such as credit limit cuts or even account closings. Banks aren’t exactly in the business of handing out free money, and if they see someone gaming the system, they may take action. Several forum users at FatWallet.com report seeing credit limit cuts of 50 to 95 percent of the available limit on cards. For consumers carrying a balance on their credit cards, limit cuts of that size could seriously affect credit scores by amplifying credit utilization rates.
“You definitely need to know what you’re doing, if you apply for multiple cards,” says Dubash. “You must spread it out across different credit bureaus to minimize the credit inquiries. And it’s important to avoid doing anything that can indicate that you might be a risky borrower, like carrying high credit card balances or paying late.”