Credit Card Churning: What You Need to Know

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Many banks offer credit card rewards for new signees, and in fact, it’s pretty common practice for banks to give out amazing freebies or huge discounts for first-time credit cardholders. Naturally, people have found a way to exploit these offers in a practice called ‘credit card churning’.

What is Credit Card Churning?

At its most basic, credit card churning is the practice of repeatedly applying for new credit cards from different banks in order to take advantage of that particular bank’s welcome bonuses or promos for first-time card owners.

Once the first-time or welcome promos are used up, usually within the first few months, people will simply cancel the credit card so that they don’t have to pay for the annual maintenance fees (first-time credit card owners usually get the first year of maintenance fees off).

Of course, the problem with this is you now have multiple lines of credit. And it’s not uncommon for people who practice credit card churning to get caught up with all the credit cards that they start spending more than what they can afford, burying them in debt and ruining their credit scores.

There are, of course, ways to avoid going into debt when credit card churning, most of which involves controlling your spending and managing your finances as well as you can, but if you don’t keep it in control, you’ll find that the rewards simply aren’t worth it.

Credit card churning isn’t illegal, but while banks don’t exactly discourage the practice, they’re also not the biggest fans of people who spend on things without being able to pay them back.

What are the Benefits of Credit Card Churning?

First-time credit card holders are often offered amazing welcome bonuses that can include anything from freebies, airline miles, cash backs, or points that people can then use to redeem purchases, provided they spend a certain amount of money within a certain amount of time.

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Normally, welcome bonuses run throughout the first 90 days of you signing up for a credit card. Usually, the welcome bonuses encourage you to use your credit card for everyday purchases and other recurring charges. For people to maximize their credit card churning, however, they have to sign up for multiple credit cards so they can spend more and thus earn more rewards.

When people do this, they’ll usually a ‘primary’ credit card to purchase things for the points and then split the overall bill of the primary card across their secondary or tertiary cards, using cash advances and balance transfers. These cards then become a ‘primary’ card once the former’s promo period runs out.

Once the promo period of any new card runs out, there’s usually no obligation to continue using the cards, and people will simply either stop using the card or cancel it so they don’t run the risk of overspending.

Are There Limits to Credit Card Churning?

Of course, while most banks don’t exactly discourage credit card churning, they do want to build a loyal customer base. Rather than discourage credit card churning, most banks will encourage people to stay on with their institution by offering long-term rewards that can be redeemed after a certain amount of time.

Some banks, however, do take steps to actively discourage credit card churning by limiting the number of credit cards a single person can apply for, with this amount varying depending on the bank’s policies (the limit is either set within a certain period of time or over an entire lifetime). However, many people still practice credit card churning despite these limitations, focusing instead on finding new strategies about the cards they open and the banks they deal with.

Does Credit Card Churning Impact Your Credit Score?

Credit card churning impacts your credit score, but whether this impact is positive or negative depends on how disciplined you are in paying off your debt.

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Regular payment history accounts for a whopping 35% of your credit score, while credit utilization accounts for another 30%; 10% of your credit score comes from hard inquiries by the card issuer, which can reduce or increase your credit score by up to 10 points. Depending on the bank, opening new accounts in a relatively short amount of time can also lower your credit age, a factor that takes up 15% of your credit score (the ‘older’ your credit age, the better).

Remember: the better your credit score, the better deals, and the better chances you have of being approved for other loans (depending on how much mortgage you can afford).

If you’re able to make regular and timely monthly payments while keeping your credit card balance low, your credit score isn’t going to suffer much; in fact, if you do it right (i.e. you pay off your monthly payments on time and in full), you might actually see your credit score improve because of credit card churning. Of course, the opposite is also true: have a delayed payment or go over your credit card balance, and you’ll see your credit score sink faster than the Titanic.

To avoid the latter, always stay up to date with your credit score. Most banks provide a free credit report every time you open an account with them. If this isn’t provided, seek out a trusted and reliable third-party credit score calculator.

Should I Avoid Credit Card Churning?

If you’ve had previous experience with credit card churning, you would know that it’s not a practice for the uninitiated. In fact, even being ‘initiated’ into the credit card churning world is a difficult process, mostly because it’s not the best practice to get into if your credit score isn’t great or if you’re inexperienced. If you fulfill any of these factors, you should avoid credit card churning (maybe invest in a life insurance policy instead):

You’ve Never Had a Credit Card Before

Credit card churning isn’t something you do if you don’t have any experience with credit cards. In fact, it’s best to build up a history of responsible credit card balance payments before even attempting to open a second credit card. First-time credit card owners need to get used to the idea of a credit card, develop charge-controlling skills, and learn how to responsibly pay their balance every month. Again, credit card churning is not for the uninitiated.

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You Credit Score is Poor

Great credit scores are a necessity for credit card churning, specifically because most banks make hard inquiries to your credit score when you open multiple credit cards. If your credit score is poor, you’ll be rejected immediately and that rejection might even be reflected further in your credit score.

You’re About to Apply for a Major Loan

Opening multiple credit cards will result in your bank making hard inquiries, which in turn affect your credit score. If you’re preparing to take out a mortgage with lower rates or a substantial loan in the next year or two years, then it might not be the best time to start (or continue) credit card churning.

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Even if you’re on time with payments, having your credit score in flux because of all the inquiries to your multiple cards will negatively affect your ability to take out a major loan.

You Don’t Spend That Much in a Month

Most credit card welcome bonuses require you to spend a nominal amount of money every month in order to qualify for the rewards. However, if you’re a normally frugal person and you don’t spend that much in a month, credit card churning is not for you.

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