Credit card churning is the practice of applying for many different credit cards for the sole purpose of earning rewards. Typically, credit card companies will offer enticing rewards to sweeten the offer for potential account holders. While most people sign up for one or two credit cards at a time and earn one-time rewards, churners open and close accounts strategically.
Deliberately timing when they apply for and close accounts allows churners to take advantage of offers, like airline miles and rewards points, over and over again. Many times churners are aiming to travel for free or rack up massive amounts of reward points. While the rewards for credit card churning seem great — so are the risks.
Does Credit Card Churning Affect Credit?
Only people with exceptional credit can pull of credit card churning. Those with average or low scores risk seriously damaging their score. Credit card churning can affect credit in a number of ways. Here’s how it impacts the factors that make up a FICO credit score:
Number of Hard Inquiries (10%)
Applying for a credit card is often considered a ‘hard inquiry’ since credit card companies have to verify qualification before issuing a card. Allowing several hard inquiries within a short period of time can negatively affect credit for up to a year. The number of hard inquiries you have counts for 10 percent of your overall FICO credit score.
Utilization Ratio (30%)
Credit reporting agencies look at the amount of credit a person has available as well as how much of it they are currently using. Opening a new account can actually lower that utilization ratio, causing credit scores to go up. Closing an account can have the opposite effect. If all cards are kept paid up, the utilization ratio is unlikely to affect a credit score either way. Your utilization ratio counts for 30 percent of your credit score.
Average Age of Credit Cards (15%)
Credit bureaus look at how long credit accounts have been open and reward borrowers for having long-standing relationships with credit card companies. Closing a card that has been open for many years can lower the average credit card age, dropping the credit score. The average age of your credit cards counts for 15 percent of your overall credit score.
The other 45 percent of a credit score is made up of payment history, types of credit accounts that are open, and new credit. As long as accounts are paid on time and debt is not accumulated, credit card churning should not affect these factors much. Always thoroughly research and/or check with a financial advisor before deciding to pursue credit card churning.
What Are the Risks and Rewards of Credit Card Churning?
Credit card churning is a game with high stakes. Successful credit card churners can reap rewards like free travel and luxury items, while unsuccessful churners risk digging themselves into a hole of debt.
Credit card companies make their money by charging interest on purchases made with their cards. While they don’t charge interest on charges that are paid in full each month, they can charge from 16 to 30 percent on any amount that is not.
To claim rewards on new credit cards borrowers typically need to spend a minimum amount over a certain period of time. This might tempt the borrower to spend beyond their means in order to reach this goal and buy things they otherwise wouldn’t have. It’s easy to see how a person could fall into debt if they aren’t careful.
Credit card churners need to stay on top of their payments, annual credit card fees, and any special rules credit card companies may have. Failure to do so could land them in a much worse place than they started.
While the risks can be devastating, the perks of credit card churning are enticing to some. Savvy churners earn rewards on money they were already planning to spend, which means they are essentially earning free money.
If borrowers can pay their credit cards in full each month churning can result in free vacations, discounted hotel rooms, free swag, and more. A quick Google search will show plenty of success stories in which credit card rewards have allowed churners to travel the world for free, although it’s important to be mindful this isn’t the case for most.
What Makes a Successful Churner?
The makings of a successful credit card churner includes self-control, vigilance and clear goals. It can be tricky to stay on top of that many credit cards at once, making it important to stay organized. A successful churner should have:
High Spending Habits
The only way borrowers can really benefit from credit card churning is if they ensure their balances are paid in full each month. With the high monthly purchase minimums required to earn most credit rewards, successful churners should already have high spending habits and the ability to pay this money back immediately.
Successful churners possess the self-control to spend only the required amount to earn rewards and ensure that money is paid off in full each month. They should already have high enough monthly spending habits that they can simply filter their purchases through a credit card and pay them off immediately. Debt can accumulate quickly if churners don’t practice restraint.
Those who have mediocre or bad credit are not likely to benefit from credit card churning. The cards with the best rewards are only available to those with high credit. Most people believe that taking on the risk associated with churning isn’t worth it for the lower-tier rewards offered to those with less than excellent credit.
Balancing several credit cards means churners must be exceptionally organized. They should have the ability to keep detailed records of how many cards they have, how long these cards have been open, fees associated with these cards, rewards earned, and any special rules the specific cards might have.
A Rewards Goal
Most churners have the end goal of traveling for free or very cheap. Successful credit card churners often have a specific goal in mind, like a destination. Knowing exactly how many points or miles they need and knowing what airline these miles are associated with can help them stay on track and pause to let their credit recover once they’ve reached their goal. Having a large purchase they would like to buy with their points can also be a great reference point.
Who Should Avoid Credit Card Churning?
Most people are not great candidates for credit card churning. Even possessing some of the above attributes does not mean a person will be successful and it’s always best to chat with a financial expert before engaging in this practice. There are a few warning signs, however, that show it’s an especially bad idea to churn credit cards. People that have the following should avoid churning:
Less Than Great Credit
Anyone who does not have excellent credit should avoid credit card churning. The risk simply isn’t worth the reward. Those who are teetering on the edge between good and bad credit should be especially wary since a slip up would be much harder to recover from. Mistakes made while attempting to practice credit card churning could impact their credit for the long term.
A Large Purchase in the Near Future
Anyone who is hoping to secure a mortgage, auto loan, or any other large purchase in the next couple of years should avoid credit card churning. A number of opened and closed credit cards is a huge red flag for lenders and churners are likely to get denied for large purchases.
A Low Income or Spending Habits
Churners should only be spending money they have already planned to spend. The minimum amount of money that needs to be spent to earn the best rewards is usually thousands of dollars. Anyone who can’t pay this off in full immediately after swiping their card should steer clear of churning.
A History of Credit Card Debt
People who have gotten themselves into trouble with credit card debt before are more likely to allow it to happen again. Anyone who has gotten into significant credit card debt and been unable to pay it off should probably avoid credit card churning.
Inexperience with Credit Cards
Those who are opening their first card or don’t have much experience with credit cards should avoid credit card churning. Lack of experience could mean that these people don’t understand how quickly debt can add up or the serious trouble they can get into by letting payments slip.
Credit card churning can be exciting and offer enticing rewards. However, the practice can also land borrowers in massive debt and destroy their credit if they aren’t careful. Only those who are willing to commit to the hassle, effort, and risks will have a chance at successful churning. Even if fully equipped with successful churning traits, anyone considering credit card churning should think long and hard to determine if it’s a good fit for their situation before proceeding.