I've always been a bit fascinated by “credit card churning” to get rewards but have been concerned about how it affects credit scores. Alice from CreditNet.com offers her perspective on the topic. – Aaron
Everyone loves the perks of frequent flier miles- you’re rewarded with a free trip for using your credit card. But some people have started to make a habit out of opening credit cards so they can earn more frequent flier miles. While this may sound like a great idea to reduce the costs of travel, it can have serious financial impacts.
So what exactly is credit card churning?
Credit card churning is the practice of opening credit card accounts to get the promotional frequent-flier miles that are usually part of sign up bonuses. Consumers will apply for multiple credit cards to get the maximum amount of frequent-flier miles. They will then close the accounts to avoid any fees. Oftentimes, they will apply for several cards in one day in what is known as an “app-o-rama.” People apply for many in one day so that credit reporting agencies will not know. It can take awhile for credit scores to process, so by doing this, lenders will not see the drop in your credit score. Credit card churning is becoming increasingly common among credit card users, as they can accumulate hundreds of thousands of miles. With this large amount of miles, they can easily fly to international destinations and stay in luxury hotels.
Sounds great, right? You can go to Chicago, New York, even Paris or London for free. But credit card churning comes with a huge price. Here are some risks you want to know before you begin churning:
- You may end up paying extra fees. If you do not close the credit card within a year, you will have to pay the credit card’s annual fee. Furthermore, if you do not make the minimum payment each month, you may accrue high interest rates and have a lot more to pay back. You can also lose your frequent flier miles if you are unable to pay off the cards.
- Churning often damages your credit score. Every time you apply for a new credit card, the credit bureau checks your history. People who open many new accounts are suspicious. So, whenever there is another hard inquiry, your credit score drops a couple points. If you open ten accounts at once, your credit score will suffer significantly. Also, the more credit cards you apply for, the higher your chances are of being denied. Getting your credit card application denied can also lower your credit score.
- Low credit scores means it is harder to get loans and other credit cards. With a low credit score, it can be very hard to get the money that you need. Banks assume that you are a liability and will be unable to repay your debts. As a result, you will not be approved and will be stuck with no financial assistance.
Churning credit cards sounds like a great idea. But in reality, it is very dangerous and often leads to damaged credit scores. So get informed and stay cautious before you jump on the bandwagon!
This article was written by Alice Bryant, a personal finance and credit card expert who also contributes regularly to Creditnet.