How Credit Card Churning Can Backfire -- Badly

Credit card churning can become a clever idea gone bad.

Opening a credit card can be pretty lucrative. For example, you might earn airline points or cash back. Your card could come with a concierge who helps you make travel plans or buy tickets to see your favorite band play. And the attractive nature of many credit cards leads to credit card churning. Here, we'll cover what credit card churning is, how it started, and how badly it can backfire. 

What is credit card churning?

Credit card churning is when you repeatedly open and close credit cards to earn whatever reward that card happens to offer at the moment. If you have an excellent credit score, you may find it dangerously easy to open as many cards as you like. 

How credit card churning got its start

Once credit card companies began to offer bonuses to those who opened a card with them, people took advantage of the situation. They would open a card, use it long enough to claim their reward, then close the card out or stop using it. As rewards piled up, they told others about the practice, and it caught on. Soon, credit card churning was considered a savvy way of getting something for nothing.

Credit card companies noticed the trend

To be clear, there's nothing illegal about credit card churning. However, credit card companies see it as gaming the system, and many have put roadblocks in the way to slow (or stop) the practice. 

As recently as last week, I noticed an article revealing "the best credit cards to churn." It might as well have a headline that reads "Credit Card Companies About to Put Churning Protections in Place." 

Until then, if you decide to employ the strategy of credit card churning, do so at your own risk. 

Here are some ways credit card churning may cost you more than it's worth.

Credit card companies are clever

Card card issuers know all too well about churning. They're also becoming more sophisticated about spotting churners. You should be aware: Credit card issuers have a legal right to shut down your account without warning. 

Let's say you're going on vacation, and your credit card is declined as you check out of your hotel. You had no idea it was canceled by the credit card company. Unless you have another way to pay for the room, you could be in hot water. 

But there's more trouble associated with a canceled credit card than inconvenience or embarrassment. 

"Utilization" is worth 30% of your FICO® Score. Here's how that works:

• In this scenario, you have three open credit cards, each with a $5,000 spending limit. That gives you $15,000 in available credit.
• Between the three cards, you owe a total of $5,000, so you're utilizing 33% of the credit available ($5,000 ÷ $15,000 = 0.33).
• Your credit card company recognizes a pattern of churning and cancels your card. Now, you only have a total of $10,000 credit available. Suddenly, owing $5,000 means you're utilizing 50% of your available credit. 
• Because the amount of available credit you're utilizing increases, your overall credit score takes a hit.

It's not a matter of "finders keepers"

Before you take on a new card, it pays to read the fine print. The contract may give the company the right to take back rewards, particularly if it believes you're trying to game the system.

Over-applying also impacts your FICO® Score

"New Credit" makes up 10% of your score. Applying for one card after another pulls this portion of your FICO® Score down.

Annual fees are no joke

The best credit card rewards tend to be associated with cards carrying an annual fee. Whether you use a card or not, you'll be charged that fee each year the card is open. 

You risk debt

None of us knows what's around the corner. It could be illness or job loss. It could be another global pandemic. Even if you take a card out with no plans to carry a balance, you could find yourself in a financial corner and have to buy everyday necessities on credit. 

Another way you risk getting in too deep is by churning a card that requires you to spend a significant amount of money before rewards kick in. For example, a high-end card with excellent rewards might require you to spend $5,000 to $10,000 in the first few months of opening an account. Unless you're disciplined about paying it back in full, you'll find yourself owing money. 

There is no reason to take out a rewards card unless the rewards you receive are worth more than any interest you pay. 

There's nothing inherently wrong with a rewards credit card. The problems arise when you take on more debt than you can handle and forget to factor in the impact new cards have on your credit score.