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Using credit cards to earn travel rewards was previously a pretty obscure hobby, but in recent years, it’s gained popularity. One of the ways that these travel enthusiasts earn their rewards is through credit card churning. With this tactic, people aim to gain cash, rewards points, or miles by repeatedly opening new credit cards. While this practice can result in rewards, it also carries risks. Read on to learn more about what credit card churning is and what the potential disadvantages of seeking rewards through credit card churning are.
What Is Credit Card Churning?
While there’s no official definition for this credit card term, credit card churning is widely considered to be either the practice of applying for multiple credit cards at once, or applying for the same card numerous times, for the purpose of repeatedly earning new account bonuses. So, for example, someone may identify a few credit cards that offer lucrative sign-up bonuses. They may then apply for those cards, meet the spending requirements to earn the bonuses, and then either stop using or cancel the card to avoid the annual fee.Although churning credit cards technically isn’t illegal, credit card issuers and banks frown upon it. As such, they have put rules into place to try to prevent it.
Why Practice Credit Card Churning?
The credit card industry is highly competitive, and one of the ways that credit cards function is to offer valuable incentives for people to open new accounts. These incentives come in the form of cash back, or travel rewards points and miles, and they can be pretty valuable.
While it’s uncommon to earn more than $300 in cash back as a sign-up bonus, it’s frequently possible to earn over 100,000 airline, hotel or credit card points or miles. And when you can redeem these rewards for expensive airline tickets in business or first class, or for pricey hotel rooms, then it can be possible to receive several thousands of dollars worth of travel reservations from the bonus earned from a single new credit card account.Because of the value of these bonus offers, many are enticed to attempt the practice of credit card churning to maximize the rewards they earn.
Disadvantages of Card Churning
Credit card churning is controversial, and it isn’t for everyone. In fact, even the most prolific credit card churners will concede that there are several potentially serious disadvantages.
Damaging Credit
For one, credit card churning can cause short-term damage to your credit, which makes it inadvisable for those who are working on improving their credit score. When you apply for multiple new credit cards in a short period of time, the credit scoring formulas can interpret this as a sign of financial problems. To these formulas, a credit card churner appears to be someone who’s desperate to borrow lots of money, not necessarily someone who just wants to earn lots of points and miles.The drop in credit scores faced by churners is usually small, and it is temporary. Once you haven’t applied for any accounts in a few months, your credit score will usually rise back to where it was before. However, when someone churns credit cards and isn’t able to manage all of their new accounts responsibly, it can cause much more serious and long-lasting damage to their credit score. For example, one of the most important factors that affect your credit score is your payment history. Missing a payment or incurring debt will hurt your credit much more than having numerous recently opened accounts.
Increasing Credit Denial
Another potential problem with credit card churning is that you may get denied for future credit, given how credit cards function. Having numerous recently opened accounts is a red flag to other potential lenders, who could deny you for that reason. Also, there are now several credit card issues that will no longer approve new credit card applications to those who have opened a certain number of new credit card accounts within a designated amount of time.
Increasing Debt
One of the worst possible outcomes of credit card churning can be increasing debt. If opening new credit card accounts creates an incentive for you to overspend and incur debt, then the rewards you receive won’t be worth anything close to the credit card interest charges you pay and the damage you do to your credit. Those who attempt credit card churning must commit to checking their credit card statement balance each month paying it in full.Overspending is also a possibility due to the minimum spending requirements of the credit cards that offer the most valuable sign-up bonuses. For example, a credit card might offer new applicants 100,000 bonus points, but only after spending $10,000 within three months of account opening. This can make it tempting to overspend and incur debt in order to meet these requirements.
Card Issuer Rules Limit the Practice
As churning credit cards has become more popular, credit card issuers have enacted rules that are designed to limit churning activities. For example, Chase is known to deny new credit cards to those who have opened at least five new credit card accounts, from any issuer, within the last 24 months.
Annual Fees May Eat into Rewards
The cards that have the largest and most valuable sign-up bonuses also tend to have the highest annual fees. So, even if you earn $1,000 worth of rewards, you may still have to pay the first year’s annual fee of $500 or more.
Bank Rules Against Churning
In addition to card issuer limits on credit card churning, banks have rules that prevent you from some of the things you might do when churning credit cards.
Credit Use
Some credit card churners may use all of their available credit on a credit card, and then pay it off multiple times in order to meet the minimum spending requirement in a short period of time. However, some banks may not like it when you cycle your credit limit in this way. Banks also have rules against making purchases of cash-like instruments, such as gift cards, casino gaming chips, and cryptocurrency. Purchasing these cash-like instruments and converting them to cash to pay off a credit card bill is one way that some people meet the minimum spending requirements to earn a bonus.
Payment History
Banks will report your balance and payment history to the major consumer credit bureaus. If you have numerous credit cards and fail to make all of your payments on time, this will hurt your credit. Because of the way credit card payments work, missing a single payment can cause serious problems.
Age of Account and Credit History
When you open numerous new accounts, the average age of your accounts will fall. Doing this can hurt your credit score, but not nearly as much as missing payments. That’s because while the age of your accounts is a factor in calculating your credit score, it doesn’t carry as much weight as other factors like payment history.
Mistakes to Avoid With Credit Card Churning
Credit card churning is highly risky, but it can be done successfully when you avoid mistakes. Here are a couple common mistakes to look out for:
Opening more accounts than you can manage responsibly: If you don’t make your payments on-time, or you incur debt that you can’t immediately pay off, then churning will likely hurt you more than it helps. And if you have more debt than you can comfortably manage, you should probably be more concerned with credit card consolidation and tips on paying off credit card debt than churning.
Canceling your cards immediately after receiving the sign-up bonus: This is a very clear indicator that you don’t intend to be a profitable customer for the card issuer. In response, some card issuers may close your accounts. Some may even have rules that allow them to confiscate the reward points you’ve earned. Therefore, it’s best to keep your account open for at least a year. And if you decide to cancel it, do so after you’ve been billed the second year’s annual fee. You will receive a credit for that fee once you’ve canceled the card.
The Takeaway
Credit card churning may sound enticing, but it comes with a lot of risks. You could do serious damage to your credit score if you take on more cards than you can handle. Additionally, you may run into rules from credit card issuers and banks to prevent you from taking advantage of credit card reward offerings. If you do decide to try credit card churning, it’s important to proceed with caution and avoid common mistakes.A better bet might be to find just one credit card that offers generous rewards. If you’re searching for such a card, Lantern offers a marketplace that makes it easy to compare credit cards so you can find one that fits your needs.
Frequently Asked Questions
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Photo credit: iStock/inside-studio
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About the Author
Jason Steele
Jason Steele has been writing about credit cards and award travel since 2008. One of the nation's leading experts in this field, he has contributed to dozens of personal finance and travel outlets and has been widely quoted in the mainstream media.
