Credit card churning is a way to take advantage of the rewards and bonuses that credit card companies use to entice new customers. It involves opening up new credit card accounts and meeting certain spending requirements.
You can earn thousands of dollars and airline miles through this process, but it is financially risky. You could end up with accounts you don’t need and spend more than you otherwise would. Our credit card churning guide gives you the lowdown on how it all works and what the risks are.
Credit Card Churning Example
A bank offers cardholders 25,000 points if they open an account and spend $3,000 in the first three months. The churner opens an account and spends $3,000 by purchasing a gift card and buying a new couch.
The credit card company awards the bonus—good for two short domestic flights. The churner waits as long as required before closing the account and opening up a new one, starting the churning process again.
For credit card churners, this is serious business. They might have seven accounts open at once, and spend hours managing them, keeping track of every detail on spreadsheets.
Juggling many credit cards can earn you huge rewards, but it’s not something to take lightly. You can end up damaging your credit score and acquiring large amounts of debt.
Does Credit Card Churning Affect My Credit?
Credit card churning can negatively affect your credit in several ways, like shortening your credit age, increasing your likelihood of missing a payment and looking like a risky borrower.
When credit reporting companies like FICO® calculate your credit score, they’re assessing how safe of a borrower you are. Any behavior seen as risky can result in a lower score.
This includes opening many cards and churning them. Typically, companies look at five factors when determining your credit score: Payment history, credit utilization, age of credit, hard inquiries and credit mix.
Here’s how you can negatively affect your credit score by credit card churning:
Payment history: Any missed payments immediately impact your score. The biggest factor affecting your credit score is your payment history.
Credit utilization: Once you start spending big on cards to take advantage of great offers, your utilization increases dramatically. Credit utilization is the amount of available credit you’ve used across all your cards compared to the total credit you have available.
For example, spending $200 on a credit card with a $1,000 limit would yield a 20% utilization.
Age of credit: Opening several new cards shortens the average age of your accounts and reduces your score.
A lengthy credit history (as long as it’s good) results in a better credit score. Cardholders with credit scores in the “excellent” range often keep open the same credit cards for many years.
Hard inquiries: If you take out several new cards at once, you may appear as a risky borrower. Lenders could think you’re more likely to miss a payment, and your credit score may decrease. In other words, the more cards you take out, the greater the possibility that your score will suffer.
Each time you open a new credit card, it triggers a hard inquiry on your credit report. The hard inquiry alerts the credit bureau that you’ve taken out a new card.
Credit Mix: Piling all your debt onto credit cards is viewed as risky behavior.
Credit reporting companies look favorably on those who have different types of credit such as an auto loan, a mortgage and a credit card. You won’t achieve the best score unless you diversify your credit.
Other Dangers of Credit Card Churning
Credit card churning can be profitable and result in earning thousands of dollars in credit card rewards and offers. But what the professional credit card churners don’t often mention are the pitfalls of gambling with your credit.
Before you reach for that shiny new credit card application, here are some of the drawbacks to consider.
You risk overspending: When you open a credit card account with a lucrative sign-up deal, you’ll be required to make a minimum spend on the card—sometimes thousands of dollars in a matter of months. If you don’t need to spend this amount, you’re overspending, which defeats the purpose of churning for free perks.
You can’t keep up with your payments: If you’re not able to make your payments on time, you could end up losing a lot of money in interest. Even worse, your account could be sent to a collections agency. Both are tough on your finances and could impact your credit score.
You pay more in annual fees than you gain in rewards: All credit card companies need to make money and they often do this by charging annual fees. Once you do the math on fees and interest, you may realize that you’re spending more than what you’re gaining in rewards.
You may be blacklisted: If you’re suspected of credit card churning, a credit card company may blacklist you and close your accounts.
Safer Alternatives to Credit Card Churning
Credit card churning is risky. It requires time, a strict organizational system and could damage your credit. Luckily, there are other ways to ensure you’re getting good deals from credit cards.
- Choose a card where the perks align with what you need, rather than trying to get free stuff.
For instance, if you travel a lot, choose a card that rewards you with airline miles for each dollar spent. If you’re a frequent shopper, opt for a card that issues points for shopping at certain retailers.
- Look for cards that reward you for being loyal rather than signing up. Because credit card issuers are getting wise to churning, some now offer cardholders bigger bonuses for staying loyal.
For instance, you can earn bonuses after spending a certain amount in the first year or for making payments on time.
- Choose a hybrid approach, where you earn a sign-up bonus but then hold onto the card for a couple of years. You can usually downgrade to a card with the same company to avoid large annual fees.
For instance, while building up a solid relationship with one lender may not be as exciting as credit card churning, it pays off in the long term without as many risks.
Credit Card Churning: Proceed with Caution
Rewards credit cards range from those that give out airline miles to bonus offers of cashback. While stockpiling the rewards of sign-up bonuses on new credit cards can be tempting, it’s also risky. Without carefully managing your open credit card accounts and spending habits, you could end up with damaged credit.
If you have damaged credit now as a result of credit churning or other circumstances, you should consider looking into credit repair services to see what your options are and how you can get your credit back on track.