What is Credit Card Churning?
This blog post is based on the Financial Post’s article “Inside the risky world of credit-card churning: How people use reward programs to get endless free perks” written on April 28, 2016. Any quotes in this blog post are credited to the Financial Post.
There is a very good chance that you don’t know what churning is and you aren’t alone. The average person probably has no idea that they can significantly benefit from regularly applying for new credit cards.
Essentially, credit card churning is when you sign up for multiple credit cards for the purpose of getting the sign up bonuses for these cards. Once you’ve received the card and the bonus, you can either cancel the card or keep it until the first year free offer has expired (credit cards that offer serious benefits typically come with yearly fees, companies will often offer one year free as an incentive). Another tactic often employed by the most seasoned of churners is to reapply for the same card after they’ve cancelled their first one, in order to get the sign up bonus a second time.
Credit Card Churning: The Breakdown
Credit card churning is not for the disorganized person. In order to actually reap the benefits that churning has to offer, you’ll need to devote time each day to the practice and be able to keep track of the details of multiple credit cards at once. Here are a few of the most important things you need to know about credit card churning:
- First you’ll need to be offered or find a credit card that offers a good points system and a sign up bonus.
- Often these cards also offer even more bonus points for reaching a certain minimum spend. Typically you’ll need to charge a specific amount within the first 30-90 days.
- Once you’ve received your sign up bonus and minimum spend bonus you have two options: cancel the card or keep using it to accumulate more points.
- Keep in mind that applying for and cancelling dozen of credit cards a year could trigger a red flag that some banks and credit card companies don’t like.
- But, if you don’t cancel your card you’ll need to make sure you keep a close eye on it so that a simple credit mistake doesn’t work against the bonuses you received.
- Finally always make sure you fully understand how to use each of your cards. For example, some cards produce more points when used to make specific purchases liked gas or groceries.
The churners themselves are very secretive about their strategies. It is feared that the more people get involved in credit card churning, the more it will cause credit card companies to take notice and reduce or even eliminate these bonus perks.
Interested in more information on credit card debt? Read this article.
Where to Find Credit Card Churning in Canada
For those looking to get into churning or for those who are simply curious about the topic, there are several online communities that offer information, tips and tricks on how to get started. Keep in mind though that while some churners are willing to share their experiences some are not. Often churners are afraid that credit card companies may start to catch on.
That being said there are a few online communities that you might want to check out. Reddit, Red Flag Deals and Great Canadian Rebates all have forums and discussion where churners share their experiences, new bonuses to look out for and even advice on how to make the most out of a churn.
Although credit card churning is a relatively new and interesting way to take advantage of credit card companies’ bonuses and perks, you should still be very cautions.
The Dangers of Credit Card Churning
Here’s the bottom line, while credit card churning can provide you with a significant amount of “free” money, flights and bonuses, it is still very risky and could potentially put your credit at risk or put you into serious debt. The Financial Post explains, “…amateurs can let their debts spiral out of control, ruin their credit ratings, or get cut off completely by banks suspicious of their behavior”. To fully understand how credit churner could affect your credit score you need to know how it’s calculated.
Credit Score 101
In Canada there are two credit reporting bureaus, TransUnion and Equifax, they use 5 factors to calculate your personal credit score:
- History of payments (35%). Missed or late payments have a serious affect on your credit score, potential new lenders want to see that you can responsibly use credit.
- The amount of debt you’re carry (30%). This factors represents the amount of debt you’re currently carry compared to the amount of credit you have available to you.
- How long you’ve had your credit accounts open for (15%). The longer you’ve been responsibly using a credit account for, the better.
- Applications for new credit (10%). Every time you apply for new credit your creditors will perform a credit check, too many credit checks in a short amount of time is not good for your credit score.
- Type of Credit Being Used (10%). Having a good variety of different types of credit accounts is important to a healthy credit score.
Click here for information on how credit cards affect your credit score.
How Can Churning Affect Your Credit Score
Now that you know what factors affect the calculation of your credit score, it’s easy to see how credit card churning, if managed improperly, could have a negative effect on your credit score.
- Having too many credit cards at once could lead to missed or late payments if they become too much to keep track of all at once.
- If you max out dozens of credit cards, carrying around all that debt at once will lower your debt to available credit ratio.
- Opening and closing all your credit accounts within a short period of time means that you won’t have a long credit history.
- Too many credit checks and hard pulls of your credit score will negatively affect your credit.
- Credit cards are only one type of credit account, if you want a healthy credit score you need to have diversity in the credit accounts you have.
It is probably quite obvious that credit card churning has its undeniable pros and cons. If you have a sharp eye for certain deals and a close-to obsessive strength of mind to never pay more than is necessary, then, you may be intrigued by this secretive and risky venture. But be warned, churning is no sure-fire way to get ahead financially. It is a risky and potentially credit-score damaging undertaking.