Credit card churning is tempting. It promises a lot of upsides — namely, free money — without any downsides. Well, assuming you do it correctly.
Simply put, credit card churning works like this:
Find a credit card with a sweet sign-up bonus.
Apply for and use that card until you activate the bonus.
Stop using the card.
Collect the bonus.
Cancel the card before you pay any annual fees.
Of course, this goes against the most common advice you’ll hear about credit cards, which is:
Get one or two credit cards.
Never carry a balance month to month.
Get whatever rewards you happen to get.
What’s the right approach here? What are the downsides to credit card churning? Is the most common advice really the best advice? We asked three personal finance experts to weigh in with their thoughts.
"It's definitely worth it." — Jacob, Cash Cow Couple
It is definitely worth it. The risks are minimal in comparison to the potential gains. Applying for new credit cards has a very small impact on your overall credit score. As long as you keep a few accounts open to build your length of credit history, closing several accounts after 11 months does very little damage as well. A much larger part of your credit score is credit utilization and payment history. If you keep balances low (low utilization), and pay on time every month (build your payment history), your credit score will continue to rise throughout the process of opening and closing credit cards.
For example, Vanessa and I have opened roughly 40 cards and closed about 30 of them (combined) in the last 24 months. Our FICO scores hover at about 800.
— Jacob, Cash Cow Couple (read our review)
Jacob has a point — only 10% of your credit score is determined by the amount of new credit accounts you’ve opened recently. However, 10% is still 10%, so there are a few things you can do to help minimize the impact of opening a bunch of credit card accounts. For starters, most churners apply for a bunch of new cards all on one day, then wait a few months for they apply for any more. This way, your FICO score takes a hit for that month, but quickly rebounds, as opposed to a series of sustained hits to your score.
Not a good strategy — Natalie, Financegirl
I have never had a credit card — ever. I am a big proponent of using cash to pay for things and getting out of debt as fast as possible. I do not think think credit card churning is a good strategy as part of a financial plan. Closing credit cards hurts your credit score. Not to mention, this creates a sort of gaming habit, whereby you seek to game the credit card companies and win. This doesn't promote good financial decision making.
— Natalie, Financegirl
Natalie’s right that closing credit cards hurts your credit score, but it’s not always a deep cut. Closing a credit card account lowers your overall available credit, which, in turn, affects your credit utilization ratio. However, you can balance that out by asking for a credit increase on another card or lowering the balance you’re carrying on other cards. Closing an account can also be bad if it’s your oldest credit card because a big part of your credit score is based on how long your accounts have been open.
She’s also right that credit card churning doesn’t always reward good financial decision making. You might think, Hey, free money is the best kind of financial decision making! But credit card churning can encourage you to spend more than you normally would in order to get a bonus, leaving you with a balance to pay off over the next few months. Credit card churning is also dangerous if you forget you have a balance on a card and don’t make a payment.
Be wary of hard inquiries — Tonya, My Fab Finance
Credit card churning can be an effective method to take advantage of rewards programs and offers. HOWEVER, it requires a large amount of discipline. Undisciplined card users can find themselves in debt, negating the value of the reward offers.
Each card application will reflect as a hard inquiry on the applicant’s credit report, which could result in decreased credit scores. The churning method should be avoided if the potential churner is in the process of building their credit score or is planning a large purchase in the near future such as a home.
— Tonya, My Fab Finance
Every time someone pulls your credit report (referred to in the biz as a "hard inquiry"), your credit score actually takes a ding. Think of it like Schroedinger’s Cat — you can’t observe your credit score without changing it. (Technically, you can — it’s called a "soft inquiry" — but you don’t get nearly as much information.) If you’re trying to build your credit score or you want to have the highest credit score possible within the next few months, you’ll want to stay away from churning.
At the end of the day, whether or not credit card churning is a good idea is entirely up to you and your financial situation. If you’re the type of person who can balance a lot of credit cards and effectively manage them in such a way that you can earn rewards without getting penalized, there aren’t a whole lot of reasons not to churn. On the other hand, if you’re not this type of person or you’re trying to build your credit score, churning doesn’t make sense. Either way, as long as you’re spending within your budget and keeping an eye on when bills are due, your credit score should stay high.