Credit card churning is the art of using a credit card company’s marketing efforts to your advantage. It is a risky practice, but many use lenders’ strategies to rack up points and cash them in for rewards like vacations, gift cards, cash back, and more. In this post, our Kentucky bankruptcy attorneys at O’Bryan Law Offices will further explain credit card churning and its potential negative impact on your credit.
What is Churning Credit Cards?
Card churning is done by repeatedly opening and closing new cards that offer introductory bonus rewards for charging a certain amount of money in a specified timeframe. The goal – after spending the required amount and getting your bonus points – is paying the card off before interest charges hit the account. For example, you receive a credit card offer in the mail that promises 60,000 bonus points for signing up and spending $3,000 on the card within the first three months. The purpose of these bonus points is to draw in new cardholders who quickly pile interest-earning debt onto the card.
After paying off the card, card churners close it and apply for another rewards card. Savvy credit card churners repeat the process often to stockpile hefty amounts of points.
Is Credit Card Churning Legal?
Credit card churning is legal, but card issuers are not fans of the practice. Some lenders, like Chase, actively work to combat card churners. Chase uses its unofficial “5/24 Rule” – which means potential customers who have opened 5+ cards in the previous 24 months will be denied any Chase card products. Some lenders require higher spending amounts to earn the welcome bonus to curb card churning.
Beware, though, as card churning can land you in hot water. Buying gift cards, money orders, or other cash-like instruments can be a form of money laundering that causes trouble with the card company – and maybe even the law.
Does Churning Hurt Your Credit?
According to the FICO credit scoring model, 10% of your credit score comes from new credit inquiries. Credit card churning could hurt your credit because applying for and opening multiple credit card accounts in a short period of time may lower your score. That is why waiting six months between credit card applications is a good rule to keep in mind. However, this waiting period isn’t true for everyone. Those with excellent credit and high scores may not have to wait as long. This is the reason churners typically apply for multiple new cards in one day and then wait several months to apply for more.
However, this practice could signal financial distress and desperation to a lender. As a result, they could issue a low line of credit or reject your application outright. Keep in mind, closing card accounts after getting your sign-up bonus can ding your score as well.
Opening and closing accounts can also hurt your score by lowering the average age of your accounts. This is another factor lenders look at when they’re thinking about extending credit to you. Put unused cards away, instead of closing them, to keep both the credit line and the history. Of course, if you have an annual charge on a card you don’t use, try to downgrade your credit card to a no-annual-fee product and preserve the same card number, as well as your credit limit and history. This is referred to as a “product change,” and it’s a common churning approach.
Risks of Card Churning
Your credit utilization ratio accounts for a larger portion of your credit score. The smaller the ratio, the better. This looks at how much available credit you have versus how much of it you’re using. This can be viewed in two ways: If you have many credit cards, you’re likely to have a larger overall credit capacity and, therefore, a higher potential credit usage ratio – given, of course, that you don’t use them all at the same time. However, if you’re adding debt to several cards just to get one-time sign-up bonuses, your credit scores will take a hit until those sums are paid off.
Forgetting to pay a bill because you have so many credit cards, is another way churning may damage your credit. On-time payments are the most important aspect of determining your credit score. Setting up alerts and auto-payments can help, but even if you’re very careful, it’s still possible to get in trouble.
Churning can also be a problem if you want to get a home loan. Mortgage lenders don’t like to see a lot of opened and closed accounts on your credit history, so if you want to take out a home loan soon, churning isn’t a smart idea.
Remember, if this isn’t money you would have spent anyway, you can overdo it and wind up acquiring heaps of credit card debt. The average credit card has a 16% interest rate. Protect your credit score by tracking due dates, paying off balances in full every month, closing accounts before annual fees are added, and monitoring your credit score. To learn more ways to reduce credit card debt, speak with our debt counseling attorneys in Kentucky today.
How Banks Put Up Guardrails Against Churning
Lenders want new customers, but they also want long-lasting banking relationships with these customers. Many put safeguards in place to discourage churners. On most of its cards, American Express offers a welcome bonus once per person, per lifetime. Meaning, you won’t get the bonus again if you close a card and reapply at a later time.
Bank of America follows the 2/3/4 rule which specifies only two credit cards every two months, three credit cards per 12 months, and four credit cards every 24 months. Many Bank of America cards also don’t offer a bonus if you’ve already received one in the previous 24 months. Meanwhile, most Citibank cards have a 48 month grace period. This implies that if you apply for a card today and later cancel it, you won’t be able to reapply and receive the bonus until 48 months have passed since your first application.
Can Credit Card Churning Lead to Bankruptcy?
If you engage in card churning, but fail to keep up with your spending and due dates or pay off the balance before the interest hits, you could find yourself in the hole. According to FICO, the likelihood of people with more than six credit inquiries on their credit report declaring bankruptcy can be up to eight times more than those with no inquiries.
For More Information, Contact O’Bryan Law Offices Today
Our attorneys at O’Bryan Law Offices are skilled at helping those in need get out of financial binds. Even if you plan out your every financial move ahead of time, unexpected hardships are sometimes unavoidable. If you need help getting back on your feet after hard times, filing for bankruptcy might be the solution. For more information on how we can help you, please call our office at 502-400-4020 today, or fill out our online intake form.