Many if not all, credit cards come with intriguing rewards. While some give customers cash if they spend a certain amount of money within the first few months, others offer sign-up bonuses in the form of points or miles.
Seduced by all the potential rewards, lately, many people have engaged in credit card churning.
Before we get into the risks and benefits, let’s explain what it is.
So, What Exactly is Credit Card Churning?
It’s a fancy term explaining the opening of a credit card account which comes with sign-up bonuses, spending enough money to earn those bonuses, closing the accounts, and repeating the entire process all over again.
More often than not, churners repeatedly sign up for multiple credit cards at the same time.
To put it in perspective, let’s say a credit card company gives a $200 bonus if you spend $1000 within the first two months of signing up.
A credit card churner will spend $1000, claim their reward, and cancel the credit card.
After that, they might wait for a while before re-opening the same or a similar card and earn the bonuses before closing the account.
The entire cycle could continue for years.
Is There Any Risk?
It might sound tempting to start credit card churning, however, keep in mind that it comes with a few downsides.
First of all, it can become a time-consuming hobby, especially if you have to track multiple credit card due dates and requirement for earning various bonuses.
Worse than that, credit card churning could seriously hurt your credit score. Applying for a new credit card will have a very minimal impact on your credit score.
By the way, if you want to learn which are the best credit cards with great potential rewards, you can check out this more in depth post.
However, opening several accounts within a short amount of time could raise some eyebrows. The credit card company could give you a low credit line or even reject your credit card application. Also, closing credit card accounts after getting your sign-up bonus could cause your credit score to drop.
Another way which credit card churning could backfire is if you spend too much money trying to earn bonuses but can’t pay off your credit card balance, you might have to pay interest.
But Why It’s Still Getting So Popular?
You might find it surprising, but credit card churning is technically legal, and you could benefit nicely if you start putting it into practice.
If you close your account immediately after getting your sign-up bonus, you could avoid paying annual fees and interest, while at the same time stacking up some sweet rewards, like a free trip to Fiji or Bora Bora for free.
If you are good at this, you could potentially maximize your bonuses by churning credit cards with the best offers.
You can save money on all sorts of things, from hotel rooms to air flights.
And if you can earn your cash back, you could use the money to pay off debt or put additional money to your emergency fund.