Credit Card bonuses and rewards programs have a history as long as credit itself. Businesses as far back as 1793 provided coins for customers that frequented their stores that could be collected and traded in for items in the store. Since then, credit companies have added more extravagant rewards including immediate cash bonuses, travel points and potentially earning thousands in cash back rewards.
These incentives have created a practice referred to as credit churning, where consumers continually open and close credit cards in order to take advantage of their sign on bonuses and then move on to the next card. While this practice can reap some benefits for those who are highly organized, attentive, and responsible in their payments, this practice comes with many churning risks.
Credit Churning Risks to Credit Score
The most immediate risk to credit churning is damage to credit scores. Opening multiple credit cards, spending heavily and regularly, and closing without developing a long and consistent credit history all directly affect credit scores.
Opening multiple credit cards over time accounts for 10% of credit score calculations. Experts recommend shopping for new credit cards within a thirty-day window to lower the risk to your credit score. This is why many Credit Churners open multiple cards on the same day and spend several months participating in the rewards programs before opening new cards. Organizing these applications and tracking the cards that are already open require extensive attention and time.
The largest risk to having multiple cards is poorly managed utilization of the cards. Taking advantage of the 90-day window standard for the most tempting rewards can lead to excess spending and difficulty making payments on time, even for otherwise fiscally responsible consumers. This affects 65% of credit scores calculation as it includes the 30% calculation for debt to credit ratio and can potentially lead to the inability to pay off the card on time.
Timeliness of payments accounts for 35% of credit scores. The purpose of these card offers is to encourage over spending on unnecessary purchases to make the consumer feel like they are saving money, when in reality they are spending money on items they otherwise would not purchase.
Credit history duration is 15% of the calculation for credit scores. The longer the credit history the better it reflects in the calculation. By continually closing accounts this is hindering the build up of credit duration. To avoid this Churners should keep the cards open and not charge anything further to the account, while being mindful of what cards have annual fees.
Other Potential Risks
Not Reading the Fine Print
Credit Card companies can insert details into the fine print that can negate the consumers intentions for applying to the card. Confusing details like bonus caps, unqualified establishments that are not clearly stated, and even items that do not count towards bonus points can eliminate the perks of the card if not well researched.
It is important to keep up with continual emails and updates from the credit company. Cards can also indicate the ability to change rewards programs at any time, leaving the consumer that is building credit towards a reward empty handed.
Be sure to understand how to claim rewards prior to spending
Some credit companies advertise for benefits and perks without indicating the need for the consumer to sign up for the program prior to spending in order to gain the reward.
Not considering Annual Fees and APRs
Annual fees and APRs frequently start out at zero, but without closely tracking the multitude of cards required for credit churning it is easy to forget an annual payment is upcoming on an older card. This can lead to overdue payments affecting credit scores and encourage users to close their card and lessen their credit duration history.
Another consideration is the cost of the annual fee vs. the cost of the benefits received. If the annual fee is making the reward break even there is no benefit to opening the card.
Time is money
The amount of time that it takes to properly track, research, and monitor multiple cards required for churning successfully may not be worth the rewards. Credit churning requires spreadsheets, calculating the input cost to earn the reward, organized payment plans, and comparing deals. If the churner is not a detail-oriented person the risk of spending more than is earned in rewards is high. Dismissing the amount of work successfully navigating the system is a recipe for financial disaster and requires extensive planning before the card is applied for.
Credit Card companies are on the lookout for Churning
Being flagged as a churner could potentially lead to being blacklisted by some of the largest credit companies in the industry. These bans could be temporary, but it could also be forever.
Consumers beware if intending to make a large purchase in the near future
Mortgage lenders and loan officers check for the history of opened and closed accounts specifically when considering consumers for a loan. A poor history of credit card closures could limit their ability to successfully apply for a mortgage for a house or other expensive items.
Consumers apt to credit card debt should avoid churning
Consumers who are apt to credit card or gambling debts should avoid credit churning. It is easy to get overwhelmed with debt while seeking the tempting rewards the cards are offering. Consumers should be aware of their spending habits prior to getting involved in churning.
Rewards can be taken away
Cards will require users who are delinquent on payments to forfeit their earned credits and rewards. The more cards open the easier it is to lose track of payments.
Balance Transfers and Cash Advances don’t count
These transactions won’t help customers reach their spending minimums. They take up space in the credit limit and affect the credit score negatively. The high fees associated with these transactions are not worth the services and should only be used in the case of emergencies.