What is credit card churning?

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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 and then quickly moving on to another card.

Racking up rewards points and miles is certainly compelling, but if you take this strategy too far, it can negatively affect your credit score and other aspects of your finances.

How card churning affects your credit score

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 which 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 he or she 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 you 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. In one sense, 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.

How often should you apply for credit?

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 in order 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 of around 16 percent.

Lenders’ efforts to limit card churning

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. 

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. The Hilton Honors American Express Surpass Card and the United Quest℠ Card currently offer new cardholders the potential to earn large welcome offers. The Capital One Venture Rewards Credit Card is offering customers: 60,000 miles once you spend $3,000 on purchases within 3 months from account opening, equal to $600 in travel. 

Some card churners resort to manufactured spending—for example, buying gift cards, money orders or other cash-like instruments. This can be a form of money laundering. If you’re caught, this could get you into trouble with the card company and maybe even the law.

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

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.

The information about the Hilton Honors American Express Surpass® Card and the United Quest℠ Card has been collected independently by Bankrate.com. The card details have not been reviewed or approved by the card issuer.