What is credit card churning? Well, it’s a bit difficult to describe. You might not read about credit card churning on traditional personal finance websites because it is a bit of an ethical grey area. In essence, credit card churning is a strategy to maximize the benefits you receive from credit card companies, especially sign-up bonuses, while reducing fees and other costs. Sometimes the benefits can be chained together and be used to get a free flight or retail item. One way this can be done is by signing up for multiple credit cards all at once and them cancelling them later before the annual fees are applied.
While credit card churning is not even close to illegal, it is often times frowned upon by credit card companies. Furthermore, it can damage your credit score if not done properly. Nonetheless, churning has become a popular sport among younger jet-setter types and certain internet groups. It has even attracted the attention of Business Insider. While we do not advocate for or against credit card churning, we can detail the process for you.
Before delving into the world of churning, we should first brush-up on consumer credit scores and how they are calculated. Whenever you apply for a credit card or loan, the institution that reviews your application will first check your credit score and it will pay particular attention to your credit history and recent inquiries. The more inquiries you have, the lower your credit score. Moreover, if you’re approved for a new credit card or loan, your average credit length will be reduced. This can have a moderate to severe impact on your credit score. Credit card companies can also see that you’ve recently applied for multiple credit cards and they may begin to scrutinize your application more stringently.
Despite the risks, many people still participate in this risky endeavor. So how does the process work? First, you go and find credit cards that offer sign-up bonuses that appeal to you. For example, the new Chase Sapphire Reserve card offers 50,000 bonus points (worth $750 in travel costs) when you spent $4,000 on purchases in the first 3 months from the day your account is opened. This is a juicy find for churners out there. A churner would apply for the credit card, focus all costs onto the Chase Sapphire Reserve card until reaching that magical $4,000 mark and then cash in the points. After receiving or using the points, the churner cancels the card before the annual fee is applied.
The idea here is pretty basic: you’re going to the spend money either way, you might as well get something extra out of it without added costs. But it isn’t that simple. Again, review the basics of how your credit score is calculated and you’ll see why credit card churning is a dangerous game. One wrong move and your credit score can be damaged for months, or years, which will set you back financially. A general rule of thumb for credit card churners is apply for multiple credit cards all at the same time, every 91 days. This rule is followed to throw financial institutions off. 91 days is enough time to limit hard inquiries from damaging your credit score too harshly. Applying for credit cards all at the same time can help make it seem like you are just shopping around for credit, rather than stringing multiple applications over weeks and months, which may look suspicious.
Whether you chose to participate in credit card churning is up to you, but do so at your own risk.
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