The Risk Behind Credit Card Churning

Credit card companies are constantly sending out new reward programs, sign-on bonuses, and introductory zero percent interest offers. These promotions you find stuffed in your mailbox, are geared to make consumers believe they will save money just by using the card.

Many consumers take advantage of these card offers, even if they do not plan on keeping the account. They try to ‘fool’ credit card issuers through a method called “credit card churning”.

What is credit card churning?

Credit card churning is when consumers sign up solely for reaping the introductory offer and then close out the account.

For instance, Capital One might offer a sign-on bonus of $300 after $1000 in purchases are made in the first 90-days. A credit card churner would open the account, use it for 90-days on purchases they would have made anyway, and once their $300 reward was issued use it and close out the account.

Take a look from a financial standpoint. If you make sure not to pay any interest during those first 90-days, then the rewards might make sense. On the other hand, if you do not pay the full statement balance and end up paying interest, then rewards are worthless.

How card churning can impact your credit score

Credit cards that offer excellent rewards are usually only offered to consumers with excellent credit history. Credit card churning can hurt your scores from many angles.

  1. Average age of credit:

    Each time you apply for a new account you’re reducing your average age of credit. If you excessively apply to new credit card offers this can quickly have a big impact on your scores. Account age is used to calculate your FICO credit scores. We have seen scores drop 60 points from opening two revolving accounts within a few months of each other.

  2. Credit utilization:

    If you rack up a balance on multiple revolving accounts you will increase your balance-to-limit ratio which will drop scores. Once you pay off and close out the accounts, you may also see a hit to your balance-to-limit ratio since you’re losing the available credit that the card offered. If there is a high balance on the existing cards, scores will drop. While you churn, your credit utilization will fluctuate a lot and it’s a major factor in FICO scores.

  3. Hard inquiries:

    When card issuers send out promotions, they usually do a soft pull to prequalify you for the offer. Only when you agree to the offer and authorize a hard inquiry does it impact your credit. Having a few inquiries might not have a significant impact, but if you’re frequently applying to cards it is considered excessive inquiries and scores can drop significantly.

  4. Delinquencies:

    If you’re any good at the credit card churning method, then you will make sure not to be late or miss any payments. But, things do happen and if for some reason you’re late and negative information reaches your credit report then you can end up paying a hefty price in the long run. Just one delinquency can drop scores 60 – 120 points.

Credit card issuers are catching on

This method for getting rewards is no secret, credit issuers are aware of consumers who use their offers to leverage rewards. Credit card promotions are intended to lock you into a commitment with the credit card issuer – so they can make money off your purchases and interest. Card issuers do not benefit from consumers opening and closing accounts, it’s not illegal in any sense but is certainly frowned upon. American Express recently added a new clause to their credit card terms to make it harder for credit card churners, it allows Amex to deny a new card user of the sign-on bonus.

The new addition says:

“Welcome offer not available to applicants who have or have had this Card. We may also consider the number of American Express Cards you have opened and closed as well as other factors in making a decision on your welcome offer eligibility.”

Is the churn worth the hassle?

Credit card churning is a timely process that takes a lot of research and communication with credit card issuers for it to be done properly. The potential impact to credit scores and history is reason enough to question whether the short-term rewards are helpful in the long-term. It can take years to recover from negative data on credit. Damaged or weak credit scores can mean significantly higher interest rates on mortgages, car loans, business loans, student loans, and can impact insurance rates.


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