Credit Card Churning: The Mechanics and the Risks

Credit card issuers like to entice new users by offering rewards or bonuses for new accounts. While it is a decent marketing tactic, many applicants attempt to game the system by rapidly opening and closing accounts to maximize rewards in a practice called credit card churning.

There is nothing illegal about the practice, but some argue the ethical implications and card issuers frown on it. To nip the issue in the bud, many issuers have instituted lifetime rewards and other stipulations to avoid such applicants.

While credit card churning is questionable, is it also beneficial, or does it harm your credit? To know the answers, you will need to learn the specifics of the process.

The Mechanics of Credit Card Churning

The churning process is a cyclical one. It involves applicants acquiring credit cards with the sole intention of receiving the introductory bonus before closing the card. A card churner will typically open several cards in quick succession, earn the rewards, close the accounts, and wait a few months before attempting the entire cycle again. Some users do not close the accounts; they only stop using the cards.

While churning sounds harmless, users must remember that most rewards or bonuses require cardholders to hit specific milestones or spending requirements, resulting in a high balance. However, some churners figured out ways to achieve this with minimal risks.

With growing awareness of the credit card churning process, several card issuers — the most notable being American Express and Chase —adopted new strategies to reduce their exposure. Some issuers are even taking extreme action against would-be churners, including closing accounts.

The Potential Downsides of Churning

Credit card churning is a risky endeavor despite the potential for financial gains or lucrative benefits. With issuers paying more attention to the practice, users face several potential drawbacks, including:

  • Reversal of rewards
  • Forced closures
  • Annual fees
  • Growing debt
  • Damaged credit

While churning presents an ethical gray area and could result in action against the cardholder, there is a real financial risk to the practice. Typically, an introductory bonus requires spending or charging a specific amount. If cardholders are not careful, they can acquire too much debt too quickly, which can have a lasting effect on their credit score, affecting your ability to secure future financing on larger purchases, such as a car or house.

The Credit Consequences

Aside from dealing with angry credit card issuers, credit card churning can dramatically affect your credit score. Because the process requires the frequent opening and closing of accounts, you will deal with routine hard inquiries on your credit reports. Additionally, the average age of accounts will lower, leading to a lower score. Finally, the utilization rate will skyrocket as you try to meet spending thresholds, hurting your credit score again.

When you put everything together, a credit churner's credit report will depict an immature borrower with poor spending habits and a propensity for depending on minor loans. Ultimately, credit card churning hurts your financial reputation and makes you look like an untrustworthy borrower.

While introductory offers from credit card issuers are often enticing, a responsible borrower needs to avoid the urge to open cards for the sake of receiving rewards. A healthy credit report and responsible card ownership are worth more than any short-term gains.

What are your thoughts about credit card churning? Comment below.