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Credit card churning: Does it help or hurt your finances?

Learn how the practice of credit card churning can help and hurt your financial future.

Justin Cupler

Contributing Writer at Tally

March 18, 2020

Credit card companies will go to great lengths to pull in new cardholders, including giving away free cash. No, they don’t literally throw money at you. But they do offer it in the form of bonus rewards points and cash back for signing up.

These introductory cash back and rewards bonuses are intended to benefit the credit card companies. However, through a process called credit card churning, you can use these perks to your advantage.

While credit card churning can deliver some benefits, there are also several downsides. Below, we outline the pros and cons of credit card churning. But first, let’s take a deeper dive into what credit card churning is.

How credit card churning works

We’ve all gotten that email or piece of snail mail. The credit card offer that says you’ll get 50,000 bonus points for signing up and charging a certain amount to it within the first 90 days. These bonus points are marketing tactics that credit card companies use to garner cardholders who will rack up interest-bearing debt.

Many people use these marketing attempts to their advantage through the art of credit card churning. Churning credit cards is when you open a new credit card that offers introductory bonus rewards for charging a certain amount in a fixed period. For example, you might get 60,000 bonus points for meeting a $3,000 spending requirement in the first three months. Once you spend the required amount and accrue the points, you pay off the card before any interest charges hit.

After paying off the credit card, you can close it and apply for another rewards card. Some credit card churners repeat this process again and again to amass a large number of points and cash them in for vacations, gift cards or other rewards.

Pros of credit card churning

Credit card churning is a high-risk, high-reward proposition with numerous potential benefits when executed correctly. Here are some pros of credit card churning.

Earn big sign-up bonuses

The main pro of credit card churning is the amount of cash back and other rewards you can get just for signing up and spending the money you would have anyway. You can earn a great vacation, free gift cards, cash back and much more on the credit card company’s dime.

For instance, at the time of this writing, Capital One offers 50,000 bonus miles when you sign up for its Venture rewards credit card. This is worth up to $500 in travel rewards, which could give your vacation budget a big boost. 

After earning Capital One Points, you could open a Chase Sapphire card and receive another 60,000 points for spending $4,000, which is worth up to $750 in travel rewards.

That’s $1,250 in travel credits just for signing up for a few credit cards and using them.

Improve your credit score

While credit card churning may sound bad for your credit score, it can be quite the opposite.

One of the rules of credit card churning is to never maintain a monthly balance on any credit card. You use the credit card throughout the month to pay for daily expenses and then pay it off in full when the bill is due. You repeat this process until you meet the spending requirements to receive the bonus perks.

When executed correctly, this leaves your balance at $0 and gives you a 100% on-time payment history.

Payment history is the most significant variable when calculating your FICO credit score, accounting for 35% of your score. Your FICO score considers up to seven years of payment history when calculating your score, so the impact to your credit report is long-term.

The second most important variable is your total balance, which accounts for 30% of your credit score. Churning credit cards requires paying them off in full each month, so your balance should always remain at zero.

Since credit card churning impacts the two FICO score factors with the most weight, you may see your credit score tick upward while earning all that cash back.

Incentivize good credit card practices

Carrying a credit card balance from month to month is less than ideal, as it results in interest charges that can put a dent in your financial goals. Learning how to use your credit cards responsibly and pay them off every month is a vital part of financial stability.

Credit card churning incentivizes this charge-it-up-and-pay-it-off process by giving you interest-free reward points for doing so. What better way to learn responsible credit card management than to get freebies for doing it the right way?

Cons of credit card churning

While credit card churning can be a simple way to earn rewards points in a hurry, it also comes with some drawbacks. Here are a few factors you’ll want to consider before jumping into credit card churning.

Potential credit dings

While credit card churning has a positive impact on the two highest factors on your FICO credit score, it can cause a few negative impacts, too. With every new credit card you open, you’re taking two hits: reduced length of credit history and a new credit account.

Every time you apply for a credit card, your FICO score takes a hit due to the hard inquiry the credit card company performs to see if you qualify. If you do qualify, it takes another hit when the new account appears on your report. These combine to account for 10% of your FICO score. Fortunately, these are small dings that affect your credit score for only 12 months. 

Opening a new account will also reduce your length of credit history, which accounts for 15% of your FICO score. Even if you have other cards that have been opened for years, opening a new card drags that average downward.

Annual fees

Rewards credit cards must profit somehow, and some of them do this through annual fees. These fees can quickly wipe out a large portion of the bonus rewards points or cash back you receive.

To avoid these charges, you’ll want to close the credit card before the annual fee hits. Fortunately, many credit card companies waive these fees in the first year, but you must remember to cancel the credit card before the charge hits in the second year.

Interest charges

With the average credit card interest rate sitting at 21.21% as of February 2020, interest is a quick killer of rewards points. You can avoid this by paying off the credit card in full each month, but missing the full-balance payoff for just one month can make a big dent in your rewards points.

In most cases, taking on a month’s worth of interest charges will not wipe out all your introductory bonus points, but they can cut into them significantly. 

For example, say you earn a $200 bonus for charging $3,000 on a 21.21% APR credit card. If you carry that balance into a new month, the credit card company would charge you $53.02 in interest. That’s more than 25% of the bonus gone in just a month.

Limited bonus cash-back offers

Credit card companies offer cash back and reward bonuses to boost profits. They can’t profit if they permit people to repeatedly cancel their credit cards and open new ones simply to rake in rewards.

This is why credit card companies limit these offers to new customers only. Once you get that bonus and cancel the card, you cannot get it again for at least a few years. This limits the number of rewards you can take advantage of before running out of credit card issuers to churn through.

Also, some credit card companies expand this sort of blacklisting beyond their own cards. Some companies will automatically reject applicants with more than a few new credit cards opened in a year, as this can be a sign of someone taking advantage of the system.

Getting turned down for other credit

Credit is a touchy thing, as your score can rise and fall without warning. Plus, certain types of credit require special care to get the final approval. A mortgage is a prime example of this. Once you start the process, you must keep your credit virtually unchanged until you close on the home.

If you're actively applying for new credit cards, closing old accounts and rolling balances, this could be a red flag to the mortgage company and it may rescind your pre-approval.

Proceed with caution

Credit card churning can be a quick way to secure extra cash for a vacation or to buy a big-ticket item at a discount. But you’ve got to play your cards right to maximize its effectiveness. This includes paying off balances in full every month, keeping track of due dates, monitoring your credit score and closing accounts before annual fees hit.

With the right organization and plan in place, you can earn this free cash with relative ease.