Credit Card Churning Explained

Credit card churning is a trend that has been gaining popularity in North America over recent years. But what is “credit card churning” exactly? Is it legal? Is it safe? Is it for you?

Let’s find out.

Defining Credit Card Churning

Have you noticed many credit cards on the market are loaded with freebies, welcome bonuses, and extra points when you sign up and make a minimum spend? The only problem? They don’t last forever. And when you become a retained cardholder, it’s unlikely you’ll receive these types of incentives ever again.

Some savvy people have found a way of reaping these perks, over and over gain, by credit card-churning.

Credit card churning refers to the practice of signing up for credit cards just to take advantage of their signup bonuses -which usually involve higher-than-average point values or cashback rates for a specific window of time-. These savvy people use the credit card just enough to get the bonus/perks, then cancels the card and moves on to another one.

Credit card churning is perfectly legal.

How to Credit-Card Churn?

The process is pretty straightforward….provided you carefully read all the details, particularly the fine print.

  1. You apply for a credit with a lucrative welcome bonus, of interest to you.
  2. Once you receive the card, you make sure to earn that bonus. Often, this involves spending a minimum amount on the card within a specific time period.
  3. Once you receive your welcome bonus, you can use it or sometimes, you may be able to transfer it. Then you cancel the credit card. If your card had the annual fee waived for the first year, make sure to cancel before you hit the one-year mark to avoid any fees.
  4. Repeat the process with a new card or re-apply for the same card at a later time.

Before applying, ensure you meet all the eligibility requirements, and that you understand how and when you’ll receive the bonus/perks.

Maximizing Credit Card Churning

Even though it’s tempting to apply for every credit card that offers bonuses, you have to focus on your specific goals. If you never travel, there is no point in applying for a credit card offering a free flight within North America. Do some research and keep an eye on what’s available.

You also need to avoid paying the annual fee. Most of the credit cards with very interesting offers have one. You need to keep track of the cards you have so that you don’t forget to cancel them, and that you also know when you’ll receive the bonus/rewards/perks.

Keeping track will also ensure you meet all the conditions to receive the bonus/rewards/perks. For example, you may need to charge $ 3 000.00 to the card within 90 days. You will miss out if you don’t do this. Guaranteed.

Last but not least, you need to pay the balance in full, each month. The average interest rate on a credit card is around 20%.  Interests eat into your rewards and, if allowed to grow, will essentially make them valueless.

Credit Card Churning Impacts Your Credit Score

When a lender reviews your credit to see if you qualify for a credit card, it conducts what’s called a hard credit inquiry. The inquiry will stay on your credit report for six years in Canada. If you are constantly applying for new credit cards, your credit score will decrease, and even more so if your application is denied.

A lender will also see your recent applications. Multiple applications within a short amount of time is a red flag because it suggests financial trouble.

Cancelling credit cards also impacts your score. The longer you hold onto a credit card, the better it looks on your credit report. Applying for too many new cards could bring down the average age of your accounts.

Credit Card Churning isn’t for everyone…

There are a couple of instances when it’s best not to engage in credit card churning:

  • You need a mortgage, car or student loan: see above section
  • You have existing credit card debt: Not everyone has a perfect relationship with credit. Balancing multiple bills and due dates takes effort and discipline. Best to steer clear if you have existing credit card debt or had past troubles with credit cards.

Final Word

Credit card churning can definitely provide you with amazing perks, such as free plane tickets and hotel stays. However, it can also lend you in financial trouble, if you’re not organized and disciplined.

Credit card companies and banks have also become more aware of this trend, and started putting caps on it. For example, with American Express, you can only receive the bonuses/rewards once. Other providers make you wait 2 to 3 years before you can receive it again.

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