Dubai: If you recently got your first credit card and are already considering getting a second or maybe even a third one in the coming days, doing so can hurt your financial health even more than you think. UAE-based credit advisors shed light as to why that is.
“If you plan on getting multiple credit cards at once to take advantage of the rewards offered, know that rushing through cards also poses the threat of you having to spend more to earn each of the bonuses you're after,” said Essam Kabeelali, an Abu Dhabi-based consumer financial advisor.
Looking to get more credit cards for more rewards?
“Let’s say you signed up for three cards that required you to spend Dh3,000 in three months to earn the bonus, you'd be on the hook for Dh9,000 in spending at once. Could you pull it off without jeopardising your financial health or your ability to take on more credit? Maybe, but maybe not.”
So when looking for a credit card, you may find one each for balance transfer, no annual fees, travel points, and cash back, and while it may make sense to apply for two or more credit cards to get the best one, applying for more than one credit card at a time will hamper your ability to get credit or loans.
“Applying for multiple credit cards at once affects your credit health because it signifies you are taking on new debt and this can cause your credit score to drop. Also, other factors affecting your credit health, like ‘credit utilisation’, will rise as a result,” added Kabeelali.
New cards lower average length of your credit history
“In addition to new credit, the length of your credit history also makes up a big portion of your credit score. Since getting new cards will cause the average length of your credit history to drop, this is another factor that can hurt your credit in the short-term.” So what should you do instead?
Kabeelali suggests that you're better off pursuing only one bonus at a time and making sure you can reach any spending thresholds naturally with regular purchases like groceries, fuel, insurance, and utilities.
“After all, buying stuff you don't need to earn a credit card sign-up bonus is unlikely to leave you in debt. If you jump into credit cards too soon, you might wind up in the middle of a debt problem you don't know how to fix. It takes time to build the ability to use credit more effectively,” he added.
Why it helps to pursue one credit card bonus at a time
Debt advisors widely advise that you plan strategically before applying for multiple credit cards. For instance, if you already have a good travel card, for example, you might want to open another credit card account with a lower interest rate or a promotional rate that allows balance transfers.
“The best way to use credit cards is in conjunction with a monthly budget. You can charge your purchases to earn rewards, but you should have the cash on-hand to pay your bills since the average credit card interest rate is over 16 per cent,” said Rupesh Naish, a Dubai-based debt advisor.
“It also helps to build an emergency fund you can use to cover unexpected expenses or fill the gaps if your earnings drop for any reason. If you use credit without a plan, you could live to regret it and wind up in debt for a long, long time.”
Credit card sign-ups are on the rise because of the initial bonuses or rewards they offer. Many cards offer hundreds of dirhams in cash back or travel credit for spending a specific amount of money within a few months (e.g. Dh3,000 in three months).
“Getting multiple credit cards at once for purely rewards or bonuses can be lucrative, but it often can prove costly as they can also cause people to overspend to reach the required spending minimum,” added Naish.
“I would suggest waiting a minimum of 90 days between opening new card accounts, even if you are trying to get sign-up bonuses or other rewards. Otherwise, your credit score may be negatively impacted.”
But if you do have multiple credit cards, pay off your balances in full every month to keep your ‘credit utilisation’ as low as possible. ”If you manage your credit well, having multiple credit card accounts is not necessarily bad since it decreases your credit utilisation,” he added.