What is Credit Card Churning?
Credit card churning is the practice of opening card accounts with the attention of reaping the most signup bonuses and reward points. Once the perks dry up, you close your account and move on to the next favorable deal or reopen an account with the same providers. Many financial advisory blogs will tell you that this is a cunning way to outsmart the banks and earn perks that fill your pockets with money. Even though this is true for some, I’m going to guide you through the dangers of pursuing this endeavor. In the second half of this blog, I’ll give you pointers if you’re still confident that churning is the right choice for you.
Also known as card flipping, many forums exist online with churners boasting the amazing cruise they went on last year, all on the reward points from multiple credit cards. I admit it is an enticing notion to be able to afford a holiday just by shopping.
Dangers of Credit Card Churning
Now that I’ve discussed why churning exists I’m going to tell you why it may not be for you. First off, you’re going to have to think of your credit score. As you may know, a credit score is made up of different categories and the second largest factor to building your credit score is known as “credit utilization”. This is essentially your credit card balance in proportion to your credit limit. Opening and closing credit accounts impact upon this ratio. For instance, opening a new credit card can help to spread your credit out all while increasing your credit limit.
On the opposite end, closing a credit card increases the ratio by narrowing your credit limit and thus lowering your credit score. So if you’re busy opening and closing accounts you may find that, at first, you are succeeding in getting those desirable rewards points, bonuses and cash back offers. However, when it gets to the point where these accounts are costing more than they’re worth- because the new customer honeymoon phase is over- you may find yourself in serious credit trouble, and your score will suffer.
Another area of your credit score that needs to be considered is known as the “hard inquiry” and accounts for 10% of your score. A hard inquiry is conducted by a potential lender to check your credit rating. Too many of these checks drag your credit score down. So it goes without saying that if you are getting a new credit card every other week, you are likely to be pulled down in this section.
An obvious danger is allowing your debt situation to get out of hand. Although it is possible to do this on one credit card, there is a lot more at stake if you have multiple credit cards. The danger lies when you are attempting to get those cherished reward points for a holiday, or whatever it may be, on multiple credit cards. If you aren’t paying off the debt on all these card month by month, you can find yourself in way over your head. Also, keep in mind that to earn points you’ve got to spend money. These reward points often encourage a reckless spending urge as the points must be built up over, say, the first 90 days of opening your account. There is a danger that you’ll spend more than you need which is something we’d always advise against on this blog. Mindless spending achieves nothing, and credit card churning thrives on this mentality.
If you are serious to begin churning then I’d recommend that you follow the following points:
Pay of ALL of your credit card statements every month. I am placing this as the first tip because if you feel that there is a chance you won’t be able to fulfill on this point, then you really should steer clear of churning.
Time Vs. Money. Credit card churning is well known as a time-consuming endeavor. Both are investments of sorts, and a clarity of focus and a knowledge of the market can make churning a viable way to earn holidays and discounts which do save you money. However, there is always the temptation that you will get sidetracked by an offer you don’t actually need. Moreover, many find that churning becomes distracting, that their time could be spent more productively on actually earning money rather than points. This is why it’s so important to stick to your objectives which brings me nicely onto my next point.
Planning. Once you close an account take some time to get your objectives in order. Rushing out to get the next best offer before it expires is all well and good if you are informed that your credit is healthy and the overall situation is beneficial to your finances. If you have multiple cards on the go at a single time, it’s good to set up a spreadsheet and keep track of the accumulating points, fees (see next point) and when you expect to reach your targets.
Keep track of annual fees. Remember that by having more credit cards you’ll also have more annual fees. Churning requires a lot of research in order to make a profit. It often suits those with a higher income as the bonuses have to outweigh the cost of fees. Another reason being that many cards won’t allow you to avail of the signup bonus if you’re spending habits are too low. Now, this doesn’t mean that if you don’t live in a mansion you can’t join the churning elite you’re going to have to match your spending patterns to the card credit benefits.
Offers and conditions change. It’s vital that you actually use your points. The art of churning means playing the long game. To reap the rewards, you often need to spend a few years accumulating points. Don’t forget about these points building up as overtime loyalty points decrease in value. Get to your target and cash out, as it were.