Three Rules for Earning Credit Card Rewards Without Harming Your Credit

Have you ever heard of the term credit card “churning?” It’s a process where someone signs up for a bunch of rewards credit card accounts in order to score lucrative sign-up bonuses. These bonuses often include large chunks of rewards points, which can be redeemed for cash or free travel, making the cards and the signup offers very attractive.

Some travel hackers boast of being able to travel for free over and over again, with exotic excursions paid for entirely on the back of credit card rewards. There’s just one problem. If you don’t manage your rewards credit cards properly, they could damage your credit scores.

Fortunately, it is possible to earn credit card rewards without harming your credit. In fact, if you’re smart about your strategy, you might just be able to earn some great rewards and build your credit at the same time. Here’s how.

Rule No. 1: Only Charge What You Can Afford

Rule number one when it comes to rewards credit cards is not to charge more than you can afford to pay off in a given month. There are two reasons why this rule is important.

When you rack up more credit card debt than you can afford to pay off each month, you end up wasting money, since you’ll pay some hefty interest charges on the remaining balance. The average interest rate on a general use credit card is north of 17%, which makes credit card debt some of the most expensive debt you’ll ever service. Now you’re paying for your “free” rewards, which kind of defeats the purpose.

If you’re trying to earn a signup bonus, you likely have to meet a minimum spending requirement to qualify for the offer. But, you shouldn’t let that entice you to spend more than you can afford.

There’s another issue, too: When you incur large balances, it will likely harm your credit scores, even if pay them in full.

A significant portion of your credit score is based on the amount of debt you owe as reported on your credit reports. Credit card debt is particularly problematic for your credit score, as it’s highly predictive of elevated credit risk. As a result, if you end up with large balances on your credit reports — even if you pay them in full each month — your credit scores are likely to decline.

Rule No. 2: Keep Your Payments Timely

To earn good credit scores, you have to make your payments on time. This rule applies not only to your rewards credit cards, but also to everything else on your credit reports.

The most important factor considered whenever your credit scores are calculated is the presence or lack of bad stuff. I know people like to call this the “payment history” category, but it’s really all about whether or not you have negative information on your credit reports.

A stain on your credit report isn’t the only consequence if you miss payments. If you rack up a ton of rewards points or miles, you stand the chance of losing them if you start missing payments. Card issuers often include forfeiture language in their cardholder agreements allowing them to eliminate your earned rewards if you default.

Rule No. 3: Be Careful How Often You Apply for New Credit

When it comes to opening new accounts, be surgical rather than nuclear. It’s fine to take advantage of a great signup bonus from time to time. Opening new accounts all the time, however, will likely harm your credit scores in two ways:

Too many newly opened accounts will lower the average age of your accounts. This is a mathematical certainty. It’s also worth about 15% of the points in your credit scores.
Applying for new credit too often could load you up with a damaging number of credit inquiries. Hard inquiries are the least important factor in your credit scores. However, if you really want elite level scores, like in the 800s (or even a perfect credit score), you can’t have too many inquiries.

There’s nothing wrong with earning a lot of credit card rewards, as long as you manage your accounts properly. Just remember, the ultimate reward is really a good credit score. This will translate into cheaper money throughout your entire credit life cycle, which is likely to span six decades.

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John Ulzheimer is an expert on credit reporting, credit scoring, and identity theft. The author of four books on the subject, Ulzheimer has been featured thousands of times over the past decade in media outlets including the Wall Street Journal, NBC Nightly News, The Los Angeles Times, CNBC, and countless others. With professional experience at both Equifax and FICO, Ulzheimer is the only credit expert who actually comes from the credit industry. He has been an expert witness in over 230 credit related lawsuits and has been qualified to testify in both federal and state courts on the topic of consumer credit.

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