Credit card “churning”, according to Nerd Wallet, is the practice of opening and closing credit cards multiple times per year to earn rewards currency you’re interested in. Those credit cards are then closed and the process is repeated. Credit cards can offer enticing rewards for signing up or spending a certain amount within the first few months, but is credit card churning really worth it? While many people make thousands of dollars in points or rewards, there are some obvious and not-so-obvious dangers of engaging in this practice. Here are 7 dangers of credit card churning that you should be aware of if you’re considering it.
1. Impacts Your Credit Score
An obvious danger to credit card churning is that it negatively impacts your credit score. Not only will it bring your overall score down, but it will also impact things like credit history if you don’t have a good history to begin with. Churning will also affect your recent credit card applications. According to the FICO credit scoring model, new credit inquiries account for 10% of your score. Most experts suggest waiting six months to apply for another credit card. Closing credit cards is also not recommended for a healthy credit score.
2. Harder to Get a Loan
If you’re planning on making a big purchase, like buying a home, churning is not the best option for you. Mortgage lenders are usually wary of many opened and closed accounts. In the long run, this could affect what kind of mortgage rate you qualify for. You could end up paying more in interest on your future loans if you decide to credit card churn.
3. Leads to Overspending
Credit card churning can lead to dramatic overspending to earn rewards. Especially if you are someone who has a history of getting into credit card debt, this method is not for you. You may be tempted to spend more than you can afford to meet reward minimums. Plus, if you don’t pay off the credit card on time, you will be hit with interest or fees.
4. Time-Consuming
Opening and closing several credit cards at a time can be very time-consuming. Churning takes a great deal of effort to be lucrative. Plus, you must take the time to understand all the fine print of rewards details. Closing an account can also be somewhat complicated.
5. Not as Lucrative as It Used to Be
Credit card churning used to be much more lucrative in the past than it is today. Companies have gotten much more stringent with rewards. Often, banks will send out targeted offers for rewards. If you try and apply for a targeted offer in which you weren’t part of the targeted group, you may not receive the reward. In extreme cases, banks can cancel your account and confiscate your points.
6. Takes Organization
If you aren’t organized, credit churning isn’t a good idea. You could end up paying more in fees and penalties than you end up earning in rewards. Having multiple credit cards means managing several payment due dates. Making late payments can also result in derogatory marks on your credit report.
7. Can Be Controversial
Banks and credit card issuers have implemented preventative measures against churning. For example, American Express enforces a policy where the welcome bonus for each of its credit cards can be earned only once per lifetime, making each bonus a one-time opportunity. Many companies will deny applications for new credit cards if you exceed a certain number of open and closed accounts. Ultimately, financial institutions view churning as “gaming” the system and look unfavorably upon it.
Know the Dangers
While credit card churning may be tempting, it may not align with your long-term goals. Instead of focusing on short-term rewards, it’s wise to choose credit cards that will align with your financial needs in the future. Your credit score and finances will thank you in the long run.