This is a common practice in the deal chasing community. Though the rewards are enticing and you are technically not breaking any rules, beware the hidden consequences. The most impactful consequence is a potential reduction in your credit rating/score. Credit rating agencies have simple algorithms for determining your rating, two of the most impactful inputs are 1) Average Length of Credit History, and 2) Requests for New/Additional Credit. If you are regularly requesting new cards then closing them a few months later, this will greatly reduce the benefit of any long standing healthy credit relationships you have. Requesting new cards regularly, even if you're closing out old ones, show up as requests for new credit. While this may not impact your ability to continue this exercise and reap short term benefits, it will hurt you when trying to apply for an auto or home loan in the future.
Not the first annual fee, no. Once you get a card, the first annual fee is automatically subtracted from your limit, so you have to pay it to get your whole credit limit. As far as subsequent annual fees go, if your balance is 0, then yeah nothing can hold you back from it. Just be prepared for your score to go down a bit once the card is reported as closed.
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