Credit Card Churning – the Dangers of a Credit Card Churner

The Hidden Dangers of Credit Card Churning

I’m sure you’ve noticed the dozens of credit card signup offers out there. These offers can seem tempting, and many people take advantage of them. Some people go to extreme lengths. Those people are credit card churners. If you’ve never heard of this before, you’re not alone. This practice doesn’t receive a lot of attention, and for a good reason. This article will go over what credit card churning is. We’ll talk about how it can hurt your credit score and what a credit card churner can gain.

A credit card churner can earn free travel with credit card churning.

What is Credit Card Churning?

The phenomenon of credit card churning is simple. A person opens the same card multiple times to get the particular card’s signup bonus. It can also include opening and then closing the account after you’ve gotten the bonus. An example of a bonus would be that you earn 10,000 miles after you spend x amount. So you do this, get the miles and then close the account. You repeat this process over and over again. You’ll rack up thousands of miles by doing this. Credit card churners are usually people who want to travel for extremely reduced costs or for free. Credit card churning gives them a way to do this, at least temporarily.

Will This Affect the Credit Score of a Credit Card Churner?

If you participate in credit card churning, your score will start to decline. Each time you apply for a new card, there is a hard inquiry added to your credit report. Each time you do this, your score will drop a few points. Say you open 30 cards, and your score drops 3 points with each inquiry. That is 90 points, and that can put you from excellent credit to fair credit. It is also good to know that inquiries count for 10 percent of your credit score. They stay on your credit report for two years and affect your score for one year. Also, opening a new account can lower your average credit age. This is negative because your credit age of accounts is 15 percent of your overall credit score. You want a long, healthy credit age to raise your score.

What Are The Consequences of Credit Card Churning?

This process comes with several possible consequences. Some of them are more annoying than truly damaging. However, there are a few more severe ones if you’re not careful.

Interest Payments

Each card’s bonus comes with a string attached. You have to spend x amount of the money in a given period. If you’re tempted to go on a shopping spree to hit that goal, you’ll end up in a disastrous situation. You can easily get yourself in a financial hole that you can’t get out of. Even if you leave the balance and pay the interest, your rewards won’t be worth it.

It Looks Bad to Mortgage Lenders

The last thing any potential mortgage lender wants to see if multiple open and closed accounts on a credit report. They like to see a long history on one card. They also like to see on time payments. If you are credit card churning, they’ll see the opposite. This will make them hesitant to work with you.

Multiple Monthly Payments

If you have multiple cards open that have a spending bonus, you’ll have multiple payments each month. Also, if you add more cards, it is even more likely that you’ll miss a payment. If you do, the lender can charge late fees and interest more interest expenses. This has the potential to drop you further into debt. Your credit score will also drop if you start to miss payments.

Off Focus and Sidetracked

It is very easy to lose focus of what you originally wanted the points for. You could start trying to get a Disney cruise and switch halfway through. However, the thing you changed for has an entirely different strategy. That means anything you previously saved for the cruise may go to waste. You’re also in danger of having redemption values chance. If you start a new tangent and then come back to your original one, it could be too late. Then you’ll be stuck with something you can’t use, and you wasted your time and effort.

Very Time Consuming

The entire process of credit card churning is very time-consuming. If a credit card churner really into it, you could spend over an hour each day looking at offers. They do this so that they can get the best offers and the best rates possible.

You’ll Pay Annual Fees

If you forget to cancel your card, you can end up paying annual fees. If you have ten cards and they all have an annual fee of $50, that is $500. Your issuer will usually waive this fee the first year. However, it’ll automatically charge you the second year you have the card. It will also get tough to keep track of each card’s annual fee due date.

Caught Credit Card Churning? What are the Repercussions?

Several new regulations are going into effect that is used to curb this behavior. The credit card issuers intended to use this bonuses as a reward for loyal customers. They frown on people who are taking advantage of it, and they are moving to stop it.

1. Banned
Your credit card issuer could blacklist you and stop you from opening any new accounts with them. They could also ban you from ever opening an account with them again to discourage this practice.

2. Close Accounts
Your credit card issuer could close your accounts. As soon as you get flagged as a credit card churner, they start watching you closely. Credit card churners can lose multiple lines of credit in one blacklisting. This can drop your credit score because it counts on lines of credit for your credit utilization ratio.

3. The Credit Score of a Credit Card Churner Can Drop
As stated above, you want strong lines of credit. If you lose many at the same time, your score will fall. Your credit utilization ratio could go from an acceptable level down to very skewed. You can recover from this, but it can be a long process.

How Are Credit Card Lenders Putting a Stop to Credit Card Churning?

Many credit card companies have started putting limits on cards. For example, you can only open five cards a year. They’ll deny you if you attempt to open more. Chase won’t open any new cards to applicants who have had five new cards in the past two years. This rule is called the Chase 5/24 Rule. Lenders like American Express limit how many accounts you can have open with them at one time. This limit is four accounts, and it makes credit card churning harder to do.

This article has defined what credit card churning is. We also talked about why it is risky to be a credit card churner, and how it can hurt your credit score. We touched on what can happen if you’re caught doing this as well. Finally, we finished by talking about steps lenders are taking to limit this activity. In the end, the choice is yours, and it may pay off for a while. However, if you eventually get caught, it could be more of a hassle than it’s worth.

Monica Kowollik

Director at CreditFast.com
Monica has covered credit card and personal finance news for over 15 years. From an early age, she developed an interest in financial literacy and saving money. Monica hopes to help others to improve their personal finances one article at a time.