Turning over accounts to increase commissions is sometimes called churning in the field of investments. A related use of the word in the area of credit cards defines churning as the practice of regularly opening accounts to score sign-up bonuses, miles and other rewards. The industry is well aware of the tactics and lengths that some consumers go to reap the benefits of an ever-changing landscape of credit card offers. While there’s nothing illegal about the practice, there are dangers to be on the lookout for when churning credit card offers. Here is the lowdown on credit card churning.
The biggest gains will come when credit card offers promoting special, limited time opportunities to earn big rewards are selected that maximize efforts toward reaching a particular goal quickly. So, if the goal were to earn free airfare, it would make sense to use a travel rewards card exclusively. It’s also wise to avoid working toward different rewards in the same time frame; doing so will essentially slow down the progress of achieving the main goal. Once the introductory program expires, it’s time to apply for another great offer.
Who might benefit
The strategy of churning for bigger rewards should be reserved for consumers with excellent credit and the ability to manage changing accounts on a regular basis. To be qualified for a new card as often as every 6 months you’ll need a credit score near or above 780. It will also require that you use a card extensively so that you earn the maximum reward within any parameters that are included in the terms. This may include making every major purchase, or better yet all purchases, with the card and being prepared to pay the balance off in full each and every month. Many of the most lucrative programs require a minimum purchase of a few thousand dollars within the first 90 days of opening the account to receive a hefty cash bonus.
Negative effects of churning
The amount of available credit you will be establishing by regularly opening new accounts may be a red flag to future lenders. So beware if you plan to take on a major project, mortgage or other type of bank loan while in the midst of churning for rewards. Too much available credit, regardless of how much you actually use, may be seen as risky behavior by banks and make getting the loan you need difficult or impossible. It may also make lenders wary enough to charge a higher rate of interest than you would normally be charged for any loans that are approved.
How to minimize a credit score drop
You can expect a small drop in your credit score, when you open accounts within a short period of time, so it’s best to space applications out every 12 months or longer. You can further offset potential damage by choosing lengthy introductory offers and never closing credit accounts. Once you move to a new card, it’s important that you maintain the integrity of your older accounts by using them for small purchases a few times every year.
A simple mistake can jeopardize the value of the rewards you’ve worked hard to earn. Terms of an agreement may include the loss of benefits for a missed or late payment. Reward credit cards that charge an annual fee will cut into any earned rewards.
Failure to redeem rewards is by far the easiest way to slip up and devalue your effort. Another is to ignore any expiration date or fail to complete bonus qualifications. Focus on critical due dates or specific limits associated with the credit card agreement to avoid negating the offer.
Cash rebates are the most popular reward programs. If you hope to accumulate enough cash back to make a major purchase, redemptions could be deposited into a special account until you reach your goal. Some frequent flyer programs allow miles to be transferred to another account making it easier to reach a free travel goal.
Credit card churning needs to be used with caution and isn’t for everyone. While perfectly legal, some credit card issuers have put measures in place to make the practice more difficult. Read all terms and conditions so you understand how each reward program works.
Author Bio: Noreen Ruth writes for a credit blog at Wowcreditcards.com and several other popular finance websites. She is interested in educating consumers about using credit responsibly and spreading information on legislative action that will affect their ability to borrow the money they need. She has contributed hundreds of articles to various online sites that provide content on saving money, reward credit cards, debt services, loans and other finance related topics.