Credit card companies often entice new applicants with the prospect of instant amazing rewards, leading some to churn through cards in a race to collect the most points, miles, or cash back. However, is credit card churning a good practice, and how could it affect your credit score?
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At a Glance
- Credit card churning is applying for credit cards to earn the welcome or sign-up bonus, then closing the account before excess fees, like an annual fee, are charged.
- Most banks and lenders frown upon credit card churning and have introduced rules designed to claw back dishonestly earned rewards.
- Churning can hurt your credit score.
What Is Credit Card Churning?
Credit card churning is when individuals seek to take advantage of the lucrative sign-on bonus, and introductory bonus points offer many premium credit card features. A churner is a person who frequently signs up for these rewards cards to gain the initial rewards points, only to cancel the card and move on to the next fantastic offer from another card.
Card churning is similar to the grazers found in supermarkets in some regards. Grazers – or people who wander the market looking for samples – always enjoy the freebies but never seem willing to pay for their meal. Similarly, churning is akin to “extreme couponing,” maximizing savings using multiple coupons and manufacturer rebates. Churners are essentially the same, and major card issuers and banks often view card churners in the same light that your local grocery store manager sees grazers or extreme couponers: the consensus is that they are nuisances.
How Does It Work?
So, how exactly does credit card churning work? Churning is surprisingly simple in its premise and process:
- Research and identify credit cards that provide a welcome offer or sign-up bonus in a rewards currency you’re interested in, like cash back, points, or airline miles.
- Apply for that card, meet the minimum spending requirements for the welcome offer, and get the bonus points or miles.
- Stop using the card and cancel it before an annual fee is assessed.
Many churners opt for rewards cards with no annual fee for the first year to avoid any financial outlay on fees before earning the reward.
The Benefits of Churning
As mentioned above, a credit card churner is someone who bounces from card to card, collecting freebie bonus points and then bolting. But how does this practice work in the real world? When banks are looking to enroll a large number of new cardholders, they often incentivize people to open a line of credit by offering juicy benefits. Many of these bonuses take the form of rewards points – points which are redeemable for travel, gift cards, entertainment, or even cash. Reward offers such as these are relatively common and a great way to attract new applicants.
The Downsides of Churning
If there are some benefits to credit card churning, there are significant downsides – especially if you are caught. These negatives include:
Damage to Your Credit Score
Frequently opening and closing credit accounts can have a detrimental effect on a person’s credit score. When a person applies for a line of credit, there is usually a hard inquiry on their credit score. Too many hard inquiries in a short period can negatively affect a credit rating, making it more challenging to apply for mortgages.
Frequently applying for new credit cards will also lower your accounts’ average age, which might hurt your credit score. This negative, however, is also offset by the increase in the amount of available credit you have. Spending carefully and making timely payments can help boost your credit utilization rate and your score.
Overspending
One of the most significant issues associated with credit card churning is overspending. While many new cardholder bonuses are available when the line of credit opens, other rewards rely on making a set amount of purchases over a given time, such as 10,000 miles after $500 in purchases in the first three months.
While many churners may have a plan on how to reach these spending goals in a controlled manner, others may use the spending goals as an excuse to make big-ticket purchases that they can’t afford to pay back right away. When you cannot afford to repay the entire balance each month, you risk accruing a much larger balance through fees and interest. This issue can significantly raise a person’s debt burden, which will only worsen with continued churning.
Fees and Interest
Taking on interest in big-ticket purchases that cannot be repaid in full can quickly make the rewards less valuable (or even more expensive) than they initially seemed. Late payment fees can further exacerbate the value of this rapidly declining reward. Churners also need to be wary of annual fees, as they can be an additional fee for which many fail to account.
The danger of annual fees is especially prevalent for those churners who either choose not to close a line of credit for fear of lowering the average age of their accounts or who forget. For many higher-end rewards credit cards, these fees can be in the hundreds of dollars annually – further reducing (or even eliminating) the value of the initial rewards bonuses.
Bad Relationships with Lenders
Not only can credit card churning hurt your credit score and make what seems like a reward more costly through poor planning, but churning can also severely harm your ability to receive a line of credit from major lenders.
Take Amex, for example. American Express has previously updated its credit card application language by including the right to freeze or eliminate welcome bonuses to those they deem to be abusing the system. The lender also recently changed how welcome offers are provided, opting for “up to X Membership Rewards points” instead of set amounts before applying.
Other lenders are now following suit by changing the terms of their rewards or closing the accounts of those who churn excessively. Chase’s 5/24 rule or Citi’s 48-month rule on welcome bonuses are excellent examples of banks seeking to claw back rewards earned dishonestly.
Some card companies may also protect against excessive card churning through the nullification or cancelation of points they feel are gathered in a predatory fashion. This cancelation, however, only occurs in extreme instances, and the rewards remove the points of that particular credit card company and no other reward schemes, like SkyMiles, for example.
So, Should You Churn Credit Cards?
Credit card churning is an effective way of maximizing your rewards points and saving serious money. The effectiveness of churning, however, is solely based on the skill of the individual who is churning and the amount of careful planning that goes into the strategy.
By taking a slow and steady approach to churning, you can accrue great rewards without falling afoul of major lenders. Not only that, but you can actually boost your credit score in the process. Failing to abide by the rules, however, can have serious ramifications – including losing access to bonuses from lenders. Failing to plan can also destroy credit through the fees and interest that can rapidly grow from overspending. So, if you try churning, make sure you do your homework and plan carefully.
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