Why Credit Card Churning May Be Risky

credit card rewardsI'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 cardsCredit 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.

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  1. I would like to share my experiences with credit card churning.

    My husband and I do credit card churning and paid $1,500 for a trip to Europe (London, Rome, and Paris) that would’ve cost about $15,000, staying for free in amazing 5-star hotels. These figures include food, transportation, and sightseeing/entertainment.

    He took a different trip to Europe a few years ago and had his flights fully paid for through credit card churning, though I don’t know the exact figures.

    We just booked flights to Hong Kong + Tokyo – the flights alone would cost $17,000 (flying business class). We only paid $100 in fees. We will be staying at 5-star hotels for free for about 4-5 of the nights.

    As for my credit score, I saw slight drops (about 10 points) during times I took out multiple credit cards. After time passed, my score is now higher than it was before (over 800). My husband’s score has also increased to between 790-over 800.

    We try to keep close track of when we need to close credit cards to avoid fees. I did forget to close one, and I got charged at $80 fee, but I called and got it refunded saying I didn’t want to renew the credit card. My husband also forgot to close one and paid a $60 fee, so that could be a considered a slight risk.

    An important thing to stress is that when we have to hit a $ amount spent for a credit card in order to get the award miles – example spend $1000.00 in 3 months – we don’t spend any extra money. We just use it on our groceries, gas, regular budgeted entertainment, etc. If the $ amount you have to spend is too high that we can’t hit it with our individual expenses, we either team up and both use the card for our expenses, OR we know we can’t take the card out. So we are spending no extra money. We just funnel everything through the particular card we are working on and pay them off with our bank account every billing cycle.

    Time will tell how much CLOSING all the cards will hurt my credit score later. It did not hurt my husband’s credit score when he went through the “cycle” a few years ago.

    So far the rewards have outweighed the risks for us!

  2. Credit card churning can be risky – I do have one credit card that gives me a free flight each year, so the yearly fee of $99 is worth it. The flight would cost $500+ and we tend to fly at least once a year (more like 3x/year). If you don’t do it right though, it can definitely be risky!

  3. I’d rather pay for my travels than go through this stress. One mistake and the fees you’re gonna pay will wipe out any benefits. It’s a risk I’m not willing to take.

  4. I dabble in churning and have yet to see any drop in my credit score, or any other noticeable negative consequence. Perhaps there is some threshold at which the additional cards start to have serious negative impacts.

    On the whole, I think the importance of a FICO score is somewhat overrated. The impact of a slightly lowered FICO score seems to be some minor impact on your ability to get more credit cards, or a slightly worse APR on those credit cards (which shouldn’t have any impact if you pay your balances at the end of the month). For the one really important loan (the home mortgage) an underwriter (i.e. – a human being) will be ultimately looking at your real risk profile, so the FICO score is just a small part of that evaluation.

    • Thanks for the comment Done by Forty! It is true that there are ways to be safer and riskier with credit card churning. If you only open 1 credit card at a time (leaving at least 6 months in between), your credit score may stay relatively similar. However, every time you close a credit card, your credit score drops a little. Although this may not be as important to you, the primary thing lenders use in deciding if you are eligible for a loan is your FICO score. Even if it is only slightly lower, this can impact your ability to get a good mortgage, car loan, student loan, or any other personal loan.

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