Like many people, you may receive an endless array of credit card offers via snail mail, email or any other medium through which issuers can reach you. Maybe you typically toss them in the trash, real or virtual, and go on with your day. Or are you one of those … churners?
If you're not familiar with the concept, credit card churning is the practice of repeatedly opening and closing different cards to take advantage of sign-up bonuses, cash back rewards or other incentives. When done carefully and diligently, it may pay off. But there are a number of notable risks to be aware of.
The primary advantage — and objective for that matter — of credit card churning is to accumulate points or miles (in the case of travel rewards) at a greatly accelerated pace. That accomplished, you can redeem them for rewards of cash, goods and travel deals offered by the issuer. Then, assuming you're able to pay off or transfer the balance, you "complete the churn" by closing the card and moving on to the next one.
The primary avenue for quickened points/miles accumulation is the welcome bonus. Most issuers entice new cardholders by allowing them to earn exponentially more points in an initial, limited period than regular cardholders can earn by just using the card normally over time. What's the catch? You've got to spend a specified dollar amount or more on the card during the welcome bonus period.
There are other potential treasures to be gained as well. Credit cards often partner with airlines, hotels, restaurants and other vendors to offer discounts on various services. For those who travel regularly, this can mean substantial savings on the cost of trips.
Another potential benefit of churning is the opportunity to take advantage of introductory 0% interest-rate offers. These help minimize the true cost of purchases and facilitate balance transfers from other cards. Some issuers waive annual fees for new customers as well.
Make no mistake: Credit churning is a high-risk endeavor. As sweet as those rewards may sound, you'll only earn them by hurriedly running up substantial balances on the credit cards you open. If you don't have the liquidity to pay them off or fail to transfer the balances, you could accumulate a high debt load that hurts your financial well-being and credit score.
Indeed, a negative impact on your credit score can be a nasty surprise awaiting those who try churning. And it's not just from high balances and missed payments. Frequent credit card applications trigger "hard inquiries" on your credit report, which can lower your credit score. In the same way, constantly canceling accounts in a relatively short period after opening them tends to shorten your "credit history length," which may also hurt your credit score.
Finally, many people underestimate how complicated and time-consuming credit card churning can be. Without a sound, consistent approach for managing all the accounts you're opening and closing, it's easy to lose track of cards or overlook key details in the card agreements. Many promotional offers, for example, contain strict terms that trigger high fees and interest charges if violated. The value of rewards can easily be obliterated as your balance skyrockets.
One last word of warning: Credit card issuers are well aware of the practice of churning, and they're continuously tweaking their terms to prevent or at least curtail the advantages that churners are hoping to gain. Whether you should try it is purely a personal choice. One thing's for sure — you've got to know what you're doing.
Get in touch today and find out how we can help you meet your objectives.
