What Is Credit Card Churning?
Last Updated: January 11, 2023
Credit card churning is one of the most controversial credit card strategies. It can be a great way to earn extra rewards, but there are some risks involved.
In this blog post, we’ll discuss what credit card churning is, how it works, and the pros and cons of doing it. We’ll also take a look at how churning affects your credit score and whether or not it’s worth the risk.
What Is Credit Card Churning and How Does It Work?
Credit card churning is the process of opening new credit cards to collect the welcome bonuses and then canceling the accounts before the annual fees kick in.
The most popular way to get started with credit card churning is by taking advantage of the sign-up bonus. Depending on the type of credit card and the issuer, new cardholders can earn a hefty sign-up bonus. This could come in the form of cashback, reward points, or airline miles.
Typically, users can redeem their rewards once they meet a minimum spending requirement within a certain time frame. For example, you may be able to earn $300 after spending at least $3,000 on the credit card within three months of opening the account. After reaching that threshold, you simply stop using the card and close it before it incurs any annual fees. Then you might wait a while, re-open the same card and earn the rewards again.
This cycle could continue for years and with more than one issuer or type of credit card. The goal is often to use these bonuses on travel and other big-ticket expenses.
While not illegal, this practice is controversial and frowned upon by card issuers. Many banks have come up with ways to discourage credit card churning. Some have changed their terms and conditions to add extra requirements to their reward redemption policy. Others have made the bonuses less lucrative or available just once in a lifetime.
The Pros of Credit Card Churning
There are a few big benefits to credit card churning. First, it can be an easy way to score some extra rewards points or cashback. These can then be used for travel, statement credits, or other large expenses.
Second, by canceling cards before the annual fee kicks in, you can avoid those fees entirely.
Finally, churners get to enjoy the benefits of a new credit card. They usually get no interest for an extended period of time, purchase protection, or other attractive perks.
The Downsides to Credit Card Churning
If done improperly, credit card churning can hurt your credit score. You may also incur debt that you’re unable to pay off in time for the interest charges to kick in.
Another downside is that it takes time and effort. You need good enough credit just to qualify for these cards, plus you need to track when annual fees are coming up so you can cancel in time.
Finally, there’s always the risk that a credit card issuer could close your account if they catch on to what you’re doing. What’s more, they can put you on a list that might make it hard to ever get another card from them.
How Does Churning Affect Your Credit Score?
As mentioned above, churning does have an impact on your credit score. So, it’s important to know how this will affect you before starting.
Opening a new credit card account dings your score temporarily as the application process typically involves a hard credit inquiry. While such checks have a minor impact on your score, frequent hard pulls – a result of card churning – add up pretty quickly for a more sensible drop.
Also, closing a card as part of a churning strategy decreases your average age of accounts. Since the length of time you’ve had open lines of credit is one factor in determining your score, closing older cards could hurt more than opening new ones does.
In addition, cards with low credit limits and high balances can also hurt your score by increasing your credit utilization ratio.
Finally, if you apply for several cards at once or use a bunch of different cards instead of just one or two that you pay off in full every month, it could look like you’re in financial trouble. Needless to say, this won’t be good for your creditworthiness when assessed by banks as part of a mortgage application, for example.
Final Verdict: Is Credit Card Churning Worth It?
Churning can be a great way to score some extra rewards, but it’s important to weigh the risks against the benefits to see if it’s right for you. Keep in mind that churning does have an impact on your credit score, so make sure you understand how this will affect you before getting started.