What is credit card churning?

When you get rewarded credit cards, getting cash, points, or miles can easily be addictive.

The signup bonus is the sweetest rush, as it’s usually your best chance of earning a large amount of points or a nice cash boost in a short period. After that, earning rewards is not as fast anymore, and the annual fee can be quite sobering.

However, card users prefer not only to receive their cake, but also to eat it. They turn to credit card churning, the process of frequently opening new credit cards just to earn signup bonuses, and then closing accounts. Thus, they receive high rewards, and sometimes even avoid the annual fee, as some issuers waive it during the first year.

We all know that too much cake is bad for you, and credit card churning has implications for your financial health that easily outweigh the benefits.

Here’s what you need to know about credit card churning and the risks involved.

How does credit card churning work?

“Changing credit cards is essentially the practice of frequently applying for credit cards in order to receive signup bonuses,” explains Freya Kuka, personal finance expert and founder of the Collecting Cents blog.

“Most churn people don’t even try to use the card after they use the bonus. The idea is to earn extra money, collect points or miles and earn quickly by taking advantage of bonuses.”

According to Cookie, this makes credit card dumpers “a credit card company’s nightmare.”

While the idea of ​​getting bonus after bonus may sound appealing, think twice before you decide to try this practice. By dumping money, you are not only doing a disservice to credit card issuers, but also putting your financial well-being at risk.

What makes churning a credit card risky?

First, it’s important to know what credit card churning can do to your credit.

First, frequent credit card applications do not go unnoticed, and their presence on your credit reports can affect your scores as well as how creditors see you. When you apply for a new credit card, a tough request appears on your credit report. It stays there for two years and affects your credit score for one year. The impact of a single request may be small, but if you apply for multiple credit cards in a short period of time, the damage to your credit can be significant.

For lenders and credit card issuers, it can also be a signal that you are in financial trouble or simply not responsible for your credit cards. This can create problems when applying for a loan, especially if it’s something serious like a mortgage or car loan.

Second, new credit cards on your file will lower the average credit age of your account. While the length of your credit history is not the most influential factor in your credit score, it takes a long time to improve. Combined with tough requests that lower your points, a few new credit cards can cost you a significant amount of points.

Finally, perhaps the most dramatic drop in credit score associated with credit card swaps is due to higher credit usage. Your credit utilization ratio (your credit card balance in relation to your credit card limit) is the second most important factor in your FICO score and is 30% of it.

You should aim to keep your credit usage below 30% to avoid any damage to your credit. Because credit card bonuses require minimum spending to be met, it’s easy to lose that ratio when you’re juggling multiple cards.

Risks to your financial health

When you’re chasing multiple bonuses at the same time, you may find yourself in more debt than you can afford.

“It’s very easy to lose focus and get into huge debts and other potential risks and pitfalls,” says Timothy Hansen, founder of Wealth Growth Wisdom.

“You can get into debt if you don’t make sure you have enough money to cover your monthly payments…[and] the annual fees can be a hefty sum.”

Remember that any interest you pay while trying to meet the minimum spend will also negate the rewards you earn.

Issuers fight credit card churn

Credit card issuers have long caught on to card churning. Many have rules prohibiting cardholders from using this practice. For example, Chase has the famous 5/24 rule, which prevents you from opening another credit card if you have opened more than five (with any issuer) in the last 24 months.

American Express is also quite strict and offers a lifetime bonus on most of their cards.

Citibank has a less stringent 24-month rule for most credit card products: if you cancel your card, you will not be able to reapply and receive the bonus again for at least 24 months (and sometimes up to 48 months). ).

Your credit card issuer can also fine you even without any rules. According to Lindsey Rush, founder of Spend Rich, credit card issuers are at risk of closing or being blacklisted by credit card issuers.

“Some issuers are pretty sloppy, while others won’t tolerate any games or churning,” she says. “The consequences could be the return of your rewards, the closure of your accounts, and the withdrawal of any future applications.”

Safer alternatives to churning credit cards

The truth is that churning can feel exciting, you don’t have to jump from map to map to maximize the potential of your cards. In fact, you may find it much more rewarding to choose your cards wisely based on your spending habits and goals, stick to them, and use them thoughtfully.

“I would advise being a good credit card user because credit card companies are now rewarding loyalty more than ever before,” recommends Freya Kuka. “You’re more likely to get good interest rates, great mail bonuses, and great service if you’re loyal to your credit card issuer.”

With all the perks, credits, and time-limited promotions that credit cards offer, you can often get the most out of your card if you keep it and stay up to date with any updates from the issuer. In addition, it will look good on your credit report and show creditors that you are responsible for your credit history.

bottom line

Credit card churning comes with high rewards and high risks, especially if you don’t pay off balances on your new cards right away or if your credit isn’t very high.

Instead of going for fame, we recommend focusing on the cards you have. Maximize their value and build relationships with your creditors – and only sign up for a new card when you need it.

“Card issuers are not the bad guys here,” Cooke says. “It all depends on how you use this card.”