Credit cards can be very helpful tools in your personal finance arsenal. If you use them properly, you can build your credit and increase your credit score, which will make you more attractive to lenders. You’ll have access to better interest rates and loan offers, which is incredibly useful when it comes time to purchase a car or a house.
Another benefit of credit cards is that with them, you can earn cash, rewards, and miles, which you can then use to pay off your credit card bill, snag discounts when shopping, and get free airline tickets, hotel accommodations, and fun experiences.
So many credit card issuers provide welcome bonuses, where they supply reward points or other offers to get new customers to sign up for their cards.
While it can be advantageous to sign up for a card, it’s important to be responsible when it comes to your credit – which is why you have to be very careful when it comes to credit card churning.
Some cardholders sign up for multiple rewards credit cards per year to get the points, cash, miles, and sign-up bonuses.
Then, once they’ve gotten everything they can out of the card, they close it. This is called credit card churning.
The way it works is someone will see that a credit card issuer is offering a special.
For example, let’s say Delta Airlines is saying they will provide 70,000 miles for airline travel if you spend $2,000 within the first two months of having the card.
If you were a credit card churner, you would sign up for the card, meet the minimum spending requirements, get the miles, use them, pay your bill, and then close the card, repeating the process with another new credit card.
There is no lack of offers available out there from credit card companies like Chase, Bank of America, American Express (AmEx), and Capital One – along with various airlines and hotel chains – so you could theoretically keep doing this over and over.
Additionally, while rewards credit cards typically charge an annual fee, they will often waive it in the first year, so you can avoid having to pay it if you close it out before the year is up.
While credit card churning is perfectly legal, it is a practice that is frowned upon by credit card issuers and it could have some downsides when it comes to your credit score.
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If you aren’t careful, trying to earn cash, rewards points, and travel rewards with credit card churning could land you in hot water with your credit score.
The biggest risk is that you’ll spend a lot of money to meet the spending requirements, and then you won’t be able to pay your bill in full by the due date.
Your credit utilization ratio, or the amount of revolving credit you are using divided by the total amount that’s available to you, could also go up.
It should always be under 30%; if it’s higher, it could have a negative impact on your credit score. And, once you close a card, your credit utilization ratio could rise through eliminating that line of credit from the mix
Also, once you get into debt, it becomes harder to pay off because of interest.
It could take you much more time to pay off a card because you’re also paying an average of 16.13% interest.
While some credit card issuers may waive interest for an introductory period, once that time runs out, your interest rate could jump significantly.
The lower your credit score, the higher your interest rate will be.
You may also forget to make a payment on time because you have so many cards open at once.
A missed payment could show up on the payment history on your credit report and lower your score.
If you apply for many cards in a row, then your score could go down as well because of hard inquiries.
In addition, closing your credit cards will shorten the average age of your credit accounts, which may also have a negative impact on your score (the longer your credit history, the better).
On the other hand, if you keep a card open, you may have to spend money on annual fees, which may range from $95 to hundreds of dollars per year depending on the types of perks you receive.
If you are responsible with credit cards, have a high credit score of 700 or above, know what factors will affect your credit score, and have the money to pay off your credit cards every month, then you may be able to responsibly take up credit card churning.
You should do your research by reading up on how other people successfully did credit card churning without it lowering their credit score or causing them to lose money. (There are some examples, but remember that people rarely write about their failures, so take success stories with a grain of salt.)
One thing to note is that credit card issuers have rules in place to prevent churning.
For instance, Chase has a 5/24 rule, where if you have opened more than five personal credit cards in the past 24 months from any credit card issuer, they will not let you open an account.
American Express will only let you earn a welcome bonus on a specific credit card once per lifetime.
You don’t have to use credit card churning, which is risky, to get the most out of your credit cards.
Instead, you can open up a new credit card account once every six months – at the very minimum – so that it won’t look like you’re applying for too many cards at the same time.
Instead of signing up for a rewards card, you could get a cashback card with no annual fee, and earn money without having to track your spending.
When you receive the cash, you could put it towards paying your bill, or you could get a gift card to your favorite store or restaurant.
Any time that you make a purchase, take the right card out of your wallet so that you earn the most rewards possible.
For instance, maybe you get 2% back at gas stations with one card and 5% back at restaurants, so you decide it’s better to pay with that than with cash or a debit card.
No matter what kind of card you have, always monitor your credit report through a service like Credit Karma, or through a credit bureau such as Experian, Equifax, or TransUnion to stay on top of your finances.
By using credit cards correctly and only taking up credit card churning if you can do it safely, you’ll build up your credit score and positively contribute to your financial health.