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The Pros and Cons of Credit Card Churning

·5 min read
bernie_photo / Getty Images/iStockphoto
bernie_photo / Getty Images/iStockphoto

One of the more controversial credit card strategies is known as churning. That’s when you open a new card with a big, juicy welcome bonus, use the card just enough to cash in, close the card before you get hit with an annual fee and then repeat with another card.

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“Credit card churning — or repeatedly opening and closing cards to earn rewards, such as points, miles, or cash back — is a strategy used by many card hackers,” said Laura Adams, personal finance expert for Finder.com. “While you can often qualify for a large introductory bonus after opening a new card and meeting a spending requirement, there are downsides to churning you should know.”

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Churning Is Legal and — If Done Right — Lucrative

Credit card churning comes with many drawbacks and one obvious benefit — by scooping up a welcome bonus and then hitting the road, you become the fish that snags the worm while avoiding the hook.

“Churning credit cards can be quite lucrative if you take advantage of large introductory bonus offers,” said Danielle Harrison, CFP, a fee-only financial planner and founder of Harrison Financial Planning. “With the right tactics, you can easily make a couple thousand dollars or more a year.”

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That, however, only holds true if you play it perfectly.

“Using credit churning techniques successfully can yield a big payoff in a very short time,” said James Diel, founder and CEO of Textel. “But it’s certainly risky business that you shouldn’t attempt if you’re at all tempted to overuse credit.”

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You’ll Add Hard Inquiries

Just the act of applying for credit can hurt you. Credit inquiries are a minor contributing factor to your credit score, but frequent and repeated hard pulls — a hallmark of card churning — stands out for all the wrong reasons.

“Every time you apply for a new card, companies perform a hard inquiry, which temporarily drops your score,” said David Aylor, founder and CEO of David Aylor Law Offices. “If you’re practicing card churning and applying to several companies every few months, you’ll see a significant impact.”

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You’ll Lower Your Credit Age

Like hard inquiries, your credit age plays a relatively minor role in your score — under normal circumstances. But with churning, you continuously alter your credit age by opening and closing new cards.

“Before you cancel a credit card, you need to remember that it will impact your credit age, which makes up 15% of your credit score,” said Shazia Virji, GM of credit services at Credit Sesame. “Credit age consists of your oldest account, your newest account, and the average age of all your accounts, so canceling an account lowers your credit age and puts a drag on your score.”

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You’ll Raise Your Credit Utilization Ratio

When you close a card as part of a churning strategy, all of that card’s available credit disappears and the amount of open credit you’re utilizing increases — and that’s bad news.

“Hard inquiries cause a slight dip in your credit score, but closing credit accounts can hurt you even more,” said Minesh Patel, founder of The Patel Firm. “Your credit utilization ratio accounts for around one-third of your overall FICO score, and by closing accounts, you ultimately raise your utilization ratio and negatively affect your score.”

See: 30 Things You Do That Can Mess Up Your Credit Score

The Banks Are Wise to People Gaming the System

Be careful — the pursuit of easy points could land you on a list that might make it hard to ever get another card from an issuer you run afoul of.

“Some credit card providers that are connected with major banks may even blacklist you, as you were not able to fully return their investment in you,” said Scott Hasting, CFA and co-founder of BetWorthy.

It’s not just bluster.

On Oct. 13, Forbes reported that American Express was disappearing entire accounts of even longtime cardholders who the company felt had misused special welcome offers, closing all of their cards and taking away all of their points. Amex’s aptly named RAT division (Rewards Abuse Team) blacklisted customers who collected welcome bonuses on the same card more than once, who opened the same card twice, who bought large amounts of Visa or Amex gift cards to “manufacture” spending, or who referred themselves for cards to get refer-a-friend bonuses.

“Credit companies are aware of credit card churning and several have put in place measures to stop or reduce the practice,” said Kamyar Shah. “For example, Chase has instituted a 5/24 rule. If a potential applicant has opened five or more cards within 24 months then they are denied the chance to open an account.”

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It Requires Discipline the Bank Is Betting You Won’t Have

Most personal finance experts caution against opening cards just for the bonus rewards, whether you’re churning or not — particularly if you have to spend more than you normally would in order to earn them.

“Many of these introductory offers require significant minimum spends over the first three to six months, which can be hard to pay down if you accidentally bite off a little more than you can chew,” said John Li, co-founder and CTO of Fig Loans. “Once you start incurring interest on your purchases and carrying a balance, the rewards will no longer be worth it.”

Card companies might just be turning a blind eye to churning because they expect average cardholders to get in their own way and mess it up like they do when they carry a balance or fail to keep up with rotating bonus categories.

“Most card issuers don’t crack down on it because the majority of people who try aren’t managing their cards, credit, and spending well enough to take full advantage,” said Carter Seuthe, CEO of Credit Summit. “Credit card churn is a valid strategy — if you know what you’re doing,”

But even if you can pull it off, the juice might not be worth the squeeze.

“To keep your credit score consistent, you need to keep old accounts open with a low balance and not continually change cards,” said Jake Hill, CEO of DebtHammer. “It hardly seems worth the time and effort to juggle new cards for the introductory bonus.”

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Last updated: Oct. 20, 2021

This article originally appeared on GOBankingRates.com: The Pros and Cons of Credit Card Churning