Are you a credit card rewards junkie?
Well, here is a deep dive into churning, some insights into the catches, the impact it may have on your Credit Score and some tips if you are a junkie that can’t detox.
What is credit card ‘churning’?
Credit card churning is a strategy in which people sign up for multiple credit cards, simultaneously or in succession, to earn the sign-up bonuses that are typically offered by credit card providers. There is a multitude of providers looking to tempt you into choosing them, and apart from offering better payment terms or spending limits, one of the most obvious ways is to make that sign-up bonus that much juicier.
One of the most common bonuses on offer in Australia is to earn points as part of a partner rewards program, such as the Qantas Frequent Flyer Points or Virgin Australia Velocity Points. Some cards can offer some seriously good deals, and we’ve seen offers for up to 150,000-200,000 Frequent Flyer points when you meet the minimum spend on the card.
While churning sounds scary and can have its drawbacks (which we’ll get to later) it is also a powerful and easy way to level up your personal finance game almost instantly.
Unfortunately, it’s not all sunshine and roses in the credit card space. While forward credit can be extremely useful and I think should form part of a sophisticated personal finance setup, there are things to consider such as your credit score, your capacity and willingness to take on a line of credit and the minimum spend on each card.
Credit Card Churning and Your Credit Score
In Australia, our credit score system is structured slightly different to the United States where it is essentially the be all and end all of finance (or so it seems). I’ve found that by paying my balance on time (I use my credit card just like a debit card, transferring the money instantly) and not drawing down more than 25% of my credit limit, my credit score has remained intact.
However, the risk with credit card churning is that the banks may catch onto you and stop providing you with credit cards. Credit cards are essentially a gateway for the banks, as it provides them an opportunity to lure you into their ecosystem and cross-sell you on big-ticket items such as savings accounts, and the holy grail, a juicy home loan.
The trick here is to churn your cards semi-regularly, but if you have the income, capacity, and self-restraint to do so, keep the card dormant for a little bit of extra time so it’s not an instant rinse and repeat cycle on the cards (which will see you cut-off quite quickly from further cards!).
What can impact your credit score when CC churning:
- Multiple inquiries from lenders. Whenever you apply for a new credit card (or other loan), an inquiry is listed on your credit file. A lot of inquiries in a short amount of time can have a negative impact on your credit score because it suggests you’re shopping around for products. In the worst-case scenario for lenders, it could show someone is desperate for credit. What’s more is that each inquiry can stay on your credit file for up to five years, so any potential lenders will be able to see how frequently you’re applying for new credit cards or loan products.
- Decreasing the length of your average credit account history. When you open an account, your credit file will show it as active and record details of activity (such as repayments and defaults). It also shows when an account is closed. While accounts that have been open for a long time that have good repayment history are usually seen favourably, those that are closed soon after opening can have the opposite effect. This is because it can suggest instability and a lack of financial commitment.
- Eliminating cards with good repayment history. With comprehensive credit reporting (CCR), details of your repayments may be included on your credit file. If you regularly pay off your account on time – which is the goal with credit card churning – this is seen as positive information that could improve your credit score. But cancelling those cards once you have the bonus points means that this information is no longer relevant, so it could actually hurt your credit score in some cases.
- Changing credit limits. Every time you open a new credit card account, your credit limit is added to your credit file. Lenders may consider the total amount of credit you have access to when they are looking at new applications. If your access to credit has been going up and down while you open and close accounts, it suggests instability that could hurt your credit score and/or your chances of getting approved for new credit products in the future.
Minimum Spend and Credit Card Debt
The biggest catch of all is the minimum spend on these cards. Most cards will require you to spend a minimum of $1,500 / $2,000 / $5,000 in the first 3 or 6 months to receive the bonus rewards from the card. The key to “winning” out of a churning strategy is to only use the cards when you have the expenses that already need paying. For instance, if you have a big car payment coming up or you have regular expenses that will meet the spend without trying, then it is absolutely a win. But where people fall down is they start spending to reach the minimum, at which point they may actually lose money on churning because if they had just not spent the money it would be worth more than the bonus which they will receive.
Increased spending and account fees also lead to a higher risk of credit card debt. While the goal with churning is to keep rates and fees to a minimum, it often requires careful account management to achieve that. The more cards you get, the more difficult that may become.
Credit Card Fees
While some credit cards that offer bonus points may waive the annual fee for the first year, there is a good chance you’ll have to pay account fees for some of the cards you get. This means you’ll need to carefully calculate the value of the bonus points, compare it to the annual fee costs and decide if it’s worth it to get the full value out of churning.
Whilst you should carefully consider your credit card strategy, here are some tips if you will churn 🙂
- Pay your balance in full each month
- Always make your payments in time
- Don’t take on more credit cards than you can handle
- Keep annual fees in mind
- Check new credit card offers regularly
- Use a spreadsheet to keep up with everything
- Read the fine print – always!
- Be careful with how many credit cards you open
- Avoid cash advances or balance transfer when churning
Many have been able to score a lot of bonuses such as free international flights and other rewards through the use of the cards on those big-ticket expenses. However, it’s up to you to understand your financial situation and investigate each card thoroughly before jumping in and making sure you have a setup to restrict your spending to those items that are necessary and within your spending limits.