You may have heard of credit card churning. But what is it? And should you churn credit cards?
Credit card churning is when you open a credit card that offers rewards, get the rewards, then stop using the card. You then repeat this process. It can help you earn rewards, but it can also hurt your credit score.
Discover more details about credit card churning, including the pros and cons of it. This guide should help you decide whether to churn credit cards.
Your Guide to Credit Card Churning
With credit card churning, you open credit cards just to get their introductory or special rewards. Then, you pay them off and close them. This process can be quite involved, and it is a tempting way to earn rewards. However, it is not for everyone, as it can hurt your credit score.
Further Reading: What Credit Card Issuers Allow a Co-signer? [ANSWERED]
What Is Credit Churning?
As mentioned, credit card churning is when you open a card for its rewards and close it shortly after getting said rewards. The process is a little more involved than this, however.
You start by choosing a few credit cards that have rewards you want. Your focus will be on the cards with large sign-up bonuses, which helps you accumulate rewards quickly. One common example is looking for cards with airline miles.
You then apply for the various credit cards you found. You use them just enough to get the bonuses or rewards you want, such as the miles.
Then, you stop using your cards, make sure the balance is paid off, and cancel them. Most people try to close the card before they even have to pay the first annual fee. This is possible because many cards waive the annual fee for the first year. From there, you repeat the process as often as you want.
Benefits of Credit Card Churning
Credit card churning is appealing for many reasons, including the following.
You Earn a Lot of Rewards
The most obvious benefit is that credit card churning lets you earn a large amount of rewards. This is especially true if you opt for cards that have generous bonuses when you first sign up.
You Earn Those Rewards Very Quickly
Because of the sign-up bonuses, you earn rewards via credit card churning much more quickly than you would earn them if you just stuck to a single card.
You Can Earn a Lot of Freebies
If you strategize properly and choose the right cards, you can easily earn many freebies within a single year. These can range from flights to hotel stays to cashback.
Cons of Credit Card Churning
While credit card churning may seem tempting, it has a few very important disadvantages.
It Can Hurt Your Credit Score
There is a very good chance that credit card churning will hurt your credit score. This is important, as it will affect your interest rate on loans, as well as whether you are even approved for them. It can also make it harder to get credit cards in the near future.
There are a few specific ways that churning can negatively impact your credit score.
Incurring More Recent Applications and Hard Inquiries
To start, every time you apply for a credit card, there will be a hard inquiry on your credit report. Hard inquiries temporarily drop your credit score, as the number of recently opened accounts plays a role in determining your score.
If lenders see that you opened a lot of credit cards in a short period of time, they may assume you are in a tough financial state. This is why most people wait six months between applying for multiple credit cards.
How to Avoid It
You can, however, reduce this negative impact on your credit score by applying to multiple new cards in a single day. Then, wait a few months to open more. This will also give you time to accumulate rewards.
Potential Worsening of Credit Utilization
Depending on how you use your new credit cards, you may also notice that your credit utilization ratio gets worse. This is a crucial part of your credit score, and it measures your available credit compared to how much you use. You want as low of a score as possible.
If you accumulate debt on multiple cards to earn rewards, this will hurt your utilization rate.
How to Avoid It
The solution to this, however, is simple. Just make sure to pay off your balances every month. If you do this, you should not notice a large drop in your credit utilization ratio.
Just remember that when you are done with a card and close the account, that will reduce your available credit. This, in turn, worsens your credit utilization ratio, hurting your score.
Potential Drop in Payment History
One of the biggest challenges of having multiple credit cards is remembering to pay them all off. This is especially challenging if you regularly change your cards, as you will not get in the habit of paying off each specific card.
If you miss any payments because you have too many cards to track, this will hurt your credit score. Remember that your on-time payment history is among the biggest factors affecting your score.
How to Avoid It
The good news is that you can reduce this risk by setting up automatic payments or alerts.
Closing Accounts Shortens Your Credit History
Your credit history length is one negative impact of credit churning that you cannot overcome. We already mentioned that closing a credit card can hurt your credit utilization ratio by reducing your available credit. Closing an account will also shorten the length of your credit history. Given that this is one of the factors that go into your credit score, that is a problem.
How to Avoid It
While you can't avoid this consequence when you close an account, there are alternatives. Simply put, you can keep your credit card open and just not use it.
But this is not smart if you have a card with an annual fee. If you are credit card churning, your card likely has an annual fee. After all, the cards with the best rewards will have fees, and you may be taking advantage of the fee waiver for the first year.
One alternative is to see if you can downgrade the card. This would involve staying with the same credit card company but lowering the card to one without an annual fee. This is called a product change. This will also cause you to lose your benefits.
Just remember that some card issuers will close a card if it is inactive. So, you may still need to occasionally use your downgraded card.
Additional reading: Petco Credit Card: What You Need To Know
You Don't Want to Lower Your Score – Especially Before Buying a House or Car
The fact that churning can hurt your credit score is important regardless of your situation. However, it is even more important if you plan on buying a home or even a car soon. In addition to the hit to your credit score, lenders will see the opened and closed cards on your credit report. This will make them more hesitant to lend to you. If they do approve you, expect to have a higher interest rate.
Some Card Issuers Have Rules Against It
Another disadvantage of credit churning is that it is not always possible. Some card issuers have put rules in place to discourage this practice.
For example, Chase has the 5/24 rule. Essentially, Chase automatically denies your application if you have opened more than five credit cards in the last 24 months.
Bank of America has a similar policy with some different figures. You can only be approved for up to two cards every two months. Every rolling 12 months, you can only be approved for three. Every 24 months, you can only get four. On top of that, you can't get a welcome bonus twice within 24 months.
Citibank also has limits on its welcome bonuses. Most of its cards will only give you one welcome bonus within 48 months, even if you close a card and reapply. Some, however, have no limit, and others only have a waiting period of just 24 months.
American Express discourages churners by only offering a single welcome offer per person for an entire lifetime. They also have a rule that you can't apply for more than one credit card within a five-day period. You can't apply for more than two Amex cards within 90 days.
It Is Challenging to Stay Organized
We have already touched on the fact that it is hard to stay organized when you churn credit cards. You will have a lot of due dates, spending requirements, and fees to keep track of. A mistake can hurt your credit score to a greater degree than churning already does. And it could cost you more money in fees or interest.
You Must Be Careful of Costs
You also have to be extremely careful about costs and debt when credit card churning. To start, the more credit cards you have open, the more likely you are to accumulate debt. On top of that, you have to pay attention to fees and interest rates.
With credit card churning, you open a card to take advantage of initial offers and welcome bonuses. Once you receive them, you close the card. Most churners will do this with several cards at once and repeat the process. You can earn rewards quickly with churning, but it will hurt your credit score. It can also be very tough to stay organized to avoid interest payments and annual fees.
Similar post: How Do Student Loans Affect Your Credit Score?
Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author. He's been featured on Forbes, The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.