What Is Credit Card Churning and Is It Worth It?
Credit companies regularly offer sign-up bonuses to attract new customers. Some people see it as an opportunity to make extra money. They constantly open new credit cards for the sole purpose of getting these bonuses and close their accounts shortly afterward. This practice of repeatedly opening and closing credit cards to earn sign-up bonuses is called credit card churning.
Now that you have an idea of what credit card churning is, let's see how it works in practice and whether it's worth it.
How Credit Card Churning Works
Credit card issuers have rules to discourage credit card churning. Typically, you need to wait a certain time before you can open the same type of credit card again and get the bonus. For example, you can open the same Chase card no earlier than 48 months after receiving the last sign-up bonus.
Credit card churners open several different credit card accounts, meet the minimum spending requirements to earn the intro bonuses for all of them and then cancel these cards not too long afterward. While churners wait until they can apply for the same cards again, they open another set of different credit card accounts to receive new bonuses. After receiving new bonuses, they close these accounts to start the process again.
To effectively cycle through multiple credit card issuers and rewards programs, credit churners are very methodical about the process. Churners track when they apply for credit cards and how long they have to wait until they can re-open them to receive the bonuses again.
Is Credit Card Churning Illegal?
People who churn credit cards follow the rules specified in the terms and conditions and technically aren't breaking any laws. However, while churning isn't illegal, it's a controversial practice that is frowned upon by card issuers. Credit card companies put rules to prevent credit card churning and view this practice as gaming the system.
Besides the waiting period that usually lasts a few years before you can apply for the same card and claim the bonus again, credit card issuers have additional rules designed to prevent credit card churning. Chase, for instance, has an informal policy called the 5/24 rule that rejects you for any of its cards if you've opened five or more credit accounts in the last 24 months. American Express has its once-in-a-lifetime rule that prevents getting repeating bonuses on their credit cards.
Other card issuers may take additional measures to stop people from gaming their rewards programs. Even if churning is not on your mind, it's always a good idea to read the terms and conditions of your credit card agreement - it will help you avoid unpleasant surprises.
The Drawbacks of Credit Card Churning
Credit card churning can cause significant damage to your credit. Repeatedly opening and closing credit cards will impact your credit scores on its own. But other potential hazards could harm your credit and your budget.
Because credit card churning involves managing many credit card accounts, there is a potential for a mistake that can cost you in the long run. Dealing with multiple accounts may increase the likelihood of accidentally missing a credit card payment which will be detrimental to your credit history. You could spend more money on annual fees, interest, and additional purchases you don't need than you receive in rewards. It may be harder for you to keep track of your spending, and in pursuit of rewards and bonuses, you can build up debt you won't be able to pay down.
Sign-up bonuses aren't designed as something to make money off, and they cost credit card companies money. For that reason, some people see credit card churning as an unethical practice. Aside from being slightly morally wrong, churning may get your existing accounts closed. A card issuer may shut down your credit card and bank accounts if they suspect you of gaming their reward program.
Credit card churning may require much more effort than you might expect. Churning requires constant monitoring of your credit records, careful planning and management, patience, and time spent on research. It's not for everyone. For most people, putting in the effort somewhere else could lead to better outcomes.
How Can Credit Card Churning Affect Your Credit?
Opening a new credit card account can affect your credit scores both negatively and positively. Before applying for a new credit card account, you should understand the factors that affect your credit score. Opening multiple credit lines will have a pronounced impact on your credit. Generally, opening multiple credit card accounts in a short time affects your credit score negatively.
New Hard Inquiries
When you apply for a new credit line, the card issuer reviews your credit report and assesses your creditworthiness. This process is known as a hard inquiry. Each hard inquiry stays on your credit report and can lower your credit score by a few points. When you apply for many credit cards in a short period of time, your credit score may drop considerably due to the multiple credit checks.
Lower Your Average Age of Credit Accounts
Each new account on your credit report decreases the average age of the accounts in your credit report, lowering your credit scores. Typically, a higher average age of your credit lines is better for your scores.
Affect Your Utilization Rate
If you open a lot of new credit cards, your available credit will increase, and your credit utilization rate will decrease, which is a good thing for your credit score. However, purchasing items necessary to meet minimum spending requirements to earn intro bonuses can cause your credit utilization to increase, lowering your scores.
Is Credit Card Churning Worth It?
Credit card churning is certainly a way to make some easy cash, but doing it without damaging your credit is a challenge. This strategy isn't for everyone. Perhaps you shouldn't make money off something that isn't supposed to be an income stream, but it doesn't mean you shouldn't be a savvy consumer. It's fine to take advantage of sign-up bonuses while trying a variety of credit cards and see if you like them or not, as long as you are aware of the drawbacks of credit card churning. Be responsible and conservative about how you use your credit.