Credit Card Churning: Why Is it Risky?

Credit card companies often offer special promotions to encourage new customers to apply, and many of these involve earning perks like cash back or travel points you can use on airfare or hotels to dream destinations.

Credit card churning involves signing up for multiple credit cards to capitalize on such rewards during an introductory promotional opportunity and often closing those accounts when the promotional period ends. While not illegal, this strategy has several disadvantages.

Let’s look at credit card churning and the risks it may pose to your credit and overall finances.

Key takeaways

• While credit card churning is legal, it comes with several financial risks.
• Promotional offers might have strict requirements that make it hard to get the bonuses.
• Credit card churning can potentially hurt your credit score and lead to fees and interest.
• Some credit card issuers, like Chase, have implemented rules to thwart credit card churning.

How does credit card churning work?

Credit card churning is opening multiple credit cards just to take advantage of the rewards, bonuses, and other incentives that credit card companies offer to new cardholders. These promotional offers can include thousands of travel points or miles, cash incentives, or 0% interest for a specific time period.

Cards that typically charge annual fees may also waive that fee for the first year as part of the promotion. Churners often close the credit cards once the promotional period ends and before the creditor charges an annual fee.

What are the risks?

While credit card churning sounds nefarious, the practice is completely legal, though credit card companies might include rules against it in their terms of service. It can also be a very risky strategy because of the following downsides.

Potential approval issues

If you have less-than-stellar credit, you may have trouble getting creditors to approve you for one or more new credit cards. They might think you are too risky of a borrower and worry about a potential default if they extend new credit to you. Additionally, credit card companies sometimes have rules on how many cards you can have through them, so approval may not even be possible.

Also, while there isn’t anything illegal about credit card churning, credit card companies frown upon the strategy. Some are even cracking down on people who do it, so you risk having your account closed and your rewards taken back if the credit card issuer detects churning activity. This can hurt your credit score and ability to borrow, making it harder to achieve major goals like buying a home in the future.

Strict requirements for bonuses

Most introductory credit card offers require you to spend a certain amount of money within a specified time frame to earn the rewards. For example, you might have to spend $1,000 within three months. Failing to meet this threshold means you won’t receive the reward.

However, if you’re spending money on things you don’t need just to reach the threshold, the actual rewards may be worth less than what you’ve spent to get there.

You may also run into issues if you’ve had the same credit card before but closed the account. The credit card company might have a rule that says you can only get a welcome bonus once per lifetime for the same card. Others might require waiting periods before you can receive further welcome bonuses or restrict bonuses to one per household.

Possible fees and interest

If you have a high-interest credit card and fail to pay off the balance each month, this could offset the rewards earned through credit card churning. Although 0% interest promotional offers can provide temporary relief from interest fees, with some cards, failing to pay off the balance by the end of the introductory period can result in the creditor charging you interest on the entire amount spent during the promotional period – not just the remaining balance.

Plus, consider the risk of overspending for rewards and the negative impact of that potential interest.

The value of the rewards you earn may also be less if you have to pay an annual fee for the credit card. While some creditors charge a low amount such as $25, you could pay $500 or more annually for certain cards.

Impact on your credit score

Credit card churning can hurt your credit score in several ways. Every time you apply for a credit card, you’ll usually see a hard inquiry on your credit report. Too many of these, especially in a short time, can ding your credit score.

The average age of your credit card accounts is another factor in your credit score. If you frequently open and close accounts, that activity reduces the average age of your credit history, thus hurting your score.

Another component of your credit score is your credit utilization, or how much credit you are using relative to your total available credit. Experts recommend maintaining a credit utilization of under 30% to keep your credit score in good standing. If you max out multiple cards or close accounts often, your score may suffer since you have less credit available.

Finally, opening multiple credit cards comes with more challenges in managing those accounts. One missed payment can lead to late fees and have a negative impact on your credit score. It can also lead to even higher penalty interest rates.

FAQ

Bottom line

While credit card churning might seem like a legal way to get welcome bonuses, it comes with many risks and may be against your creditor’s terms. You should also consider that it involves potential financial implications, including negative impacts on credit scores, accumulation of debt, and account closures.

Rather than engaging in credit card churning, you could try maximizing your existing credit cards’ benefits and rewards in ways that are in line with their terms of service.