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What is credit card churning?

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Credit card churning is when you frequently open new credit cards, typically with the intent to game the system by qualifying for a lucrative sign-up bonus, quickly moving from one card to the next.

Racking up rewards points and miles is certainly compelling, but if you add too many accounts too quickly, it can negatively affect your credit score and other aspects of your finances. Here’s how to open the occasional new rewards card — and take advantage of its sign-up bonus — without moving into “churning” territory, potentially damaging your credit and your finances.

Pros of opening new credit cards

A credit card sign-up bonus could be worth hundreds — maybe even thousands — of dollars in cash back or free travel. Ideally, the card will provide you with longer-term value as well. For instance, by awarding extra cash back or rewards points in areas in which you spend a lot of money.

The credit card market is dynamic, and your lifestyle is as well. I like the idea of reevaluating your credit card strategy at least once a year. If you find you’re spending a lot more on groceries, dining out, gas, travel or another rewards category, it would be smart to sign up for a new card that offers generous rewards on that type of spending.

Just remember to take it slow. It’s best to add accounts gradually and with long-term value in mind, rather than aggressively churning through cards.

By the way, while card churning is usually associated with earning rewards, it’s also worth mentioning that signing up for a good balance transfer card, with a generous interest-free introductory APR period, could save you a lot of money if you carry a balance from month to month. Given credit cards’ high interest rates, it only makes sense to pursue rewards if you’re able to pay your bills in full and avoid interest each month.

Cons of opening new credit cards

Opening too many accounts in quick succession can be problematic. Each hard inquiry (the notation a lender places on your credit report when you apply for credit) temporarily trims a few points off your credit score. An inquiry remains on your credit report for up to two years, and the impact grows as you accumulate more of these. FICO, the company that created the preeminent credit scoring model, notes, “People with six inquiries or more on their credit reports can be up to eight times more likely to declare bankruptcy than people with no inquiries on their reports.”

While card churners might simply be trying to amass a stockpile of rewards, frequently opening accounts can also signify desperation. Lenders may worry that this consumer is in financial distress and is opening a bunch of credit cards to finance expenses that they may be unable to pay back.

Account openings can also be detrimental because they lower the average age of your accounts, another factor that can drag down your credit score.

But wait a second, you might say. Maybe you have a lot of credit cards and preserve an excellent credit score by paying your bills on time and practicing other healthy credit habits. I know people who have 30-plus credit cards and top-notch credit. It can be done, just not overnight.

Over the long haul, having a lot of available credit can actually help you because it makes it easier to maintain a low credit utilization ratio (credit you’re using divided by credit available to you). Paying your bills on time and keeping your debts low are the two most important factors in FICO’s formula. But even the biggest credit card fanatics would admit that opening too many accounts all at once is risky.

What else to know about credit card churning

I generally suggest spacing out your credit applications by at least six months. It’s also important to remember that credit card issuers typically require you to spend a certain amount within your first few months, to earn the introductory bonus. The more desirable bonuses often require several thousand dollars in spending. If this isn’t money you would have spent anyway, you could overdo it and take on credit card debt. That’s a big no-no since the average credit card has an interest rate approaching 18 percent.

Chase has taken an aggressive step to combat card churning with its unofficial — but widely reported — 5/24 rule. Essentially, if you’ve opened five or more credit cards within the past 24 months, you’ll be denied any Chase cards. This is notable because Chase offers some of the most attractive rewards credit cards.

It’s also common for card issuers to restrict how often you can earn an introductory bonus on a given credit card or even a particular group of credit cards. American Express, for example, only allows you to earn a welcome bonus on each card once in a lifetime. Citi has a policy that prohibits many cardholders from receiving introductory bonuses if they’ve recently earned a bonus or closed a card within that same family of cards. For instance, if you received a welcome bonus or closed the Citi Rewards+ Card within the past 24 months, you can’t get another bonus for opening a Citi Premier Card.

Another way lenders seek to limit card churning is by requiring more spending in order to obtain the welcome bonus. They realize that sign-up bonuses can be useful ways to acquire new customers, but they want those people to stick around and become profitable long-term users of their products.

One more deterrent is that some issuers seek to claw back bonuses if you cancel the card within a year of opening the account. If you’ve had a card for more than a year and it’s no longer working for you — perhaps the annual fee is too high or you’re no longer spending much in the card’s bonus categories — a good strategy is to ask the card issuer to switch to one of its other offerings. Known as a product change, this can provide you with a better fit while avoiding any negative credit score impacts.

This is usually better than canceling the card because closing a credit card account can hurt your credit score, mostly if it causes your credit utilization ratio to spike.

The bottom line

Credit card churning is a popular sport for many, but I don’t advise it.

Don’t get me wrong. You should apply for credit cards and other financial products from time to time. Just don’t go overboard. Obtaining a short-term bonus could hurt you in the long run if it lowers your credit score, and ultimately reduces your access to credit when you really need it.

Have a question about credit cards? E-mail me at ted.rossman@bankrate.com and I’d be happy to help.