Editorial Policy

3 ways card churning can hurt your good credit

Susan Johnston Taylor

October 26, 2015

The signup bonuses on new credit cards can be tempting, but opening new accounts and then closing them once the miles or points are earned can do more harm than good.

Card issuers, too, are wise to what's called credit card churning — the repeated opening and closing of accounts to get the sign-up bonuses. Some issuers are cracking down on the practice by excluding current or past customers from the plum deals that come with opening an account.

For card issuers, the 50,000 miles or 20,000 bonus points are a way to get people with excellent credit in the door in the hopes they'll continue charging for years. Just  charge the required amount within the first month or three months of opening the card and the bonus is yours.

For new cardholders, the bonus miles or points could cover that next vacation flight or cruise. Some cardholders are experts at milking the travel benefits of sign-up bonuses.

For card churners, it's open account, get bonus, and cancel card before the annual fee (which is often waived during the first year). Then repeat, repeat, repeat. For serious churners, new accounts are opened and closed several times a year.

Similarly, some shoppers open retail credit cards to get the store's discount (“Would you like to open a card and save 15 percent?”), then rarely use the cards again.

Aside from cashing in on a windfall of points or miles or saving money at a certain retailer, card churning has a few potential downsides. Here are three to consider:

1. Dinging your credit score.

Every time you apply for credit, the lender makes a hard inquiry that shows up on your credit report. Fortunately, your score won't be ruined by a few inquiries here and there.

Say you open five cards in a month, that's going to take a bigger toll (on your credit report) than one a year. If you're going to be constantly opening and closing credit cards, that would take its toll.”
— Karl Hoffman,
Seattle division manager of Apprison, a consumer credit counseling service

“The scoring model is pretty much designed to be able to absorb one or two hard inquiries per month without hurting your credit,” says Wayne Sanford, owner of New Start Financial Corp., a credit consulting firm in McKinney, Texas. “It's built for that.”

But some credit-churning consumers have a lot more inquiries per month, and that can negatively impact their credit scores, since new credit makes up 10 percent of a FICO score.

“Say you open five cards in a month, that's going to take a bigger toll than one a year,” says Karl Hoffman, Seattle division manager for Apprisen, a consumer credit counseling service. “If you're going to be constantly opening and closing credit cards, that would take its toll.”

Credit card churning could impact your score in a few other ways, too. Since payment history makes up over a third of your score, missing payments because you're overextended or can't keep track of all your cards could damage your score.

Amounts owed make up 30 percent of your FICO score, so maxing out a card to meet the spending requirement and cash in on your bonus could also hurt your credit. And if your credit card application is denied, the lender's hard inquiry would still show up on your credit report. Consider all these variables before attempting to open multiple cards just for rewards.

“A good example of someone who should not do this is someone who's in the market for a house or a car,” Hoffman says. Mortgage lenders in particular don't like to see an excessive amount of available credit, as that creates the opportunity for a borrower to dig herself into a financial hole.

2. Charging more than you can afford.

Cards that require huge charge volumes to get the sign-up bonus could get you into debt if you use it to justify purchases you wouldn't normally make.

When it comes to credit it's a game of discipline. You know if you have got that discipline or not.”
— Wayne Sanford,
owner of New Start Financial Corp., a credit consulting firm

Hoffman says some of these offers “can be very beneficial if you're not changing your spending habits, but if you're opening these cards just to reap these rewards, you're opening this huge floodgate for all these bills.”

Be honest with yourself about whether you can handle more available credit before charging up a storm. “When it comes to credit it's a game of discipline,” Sanford says. “You know if you have got that discipline or not.” He has seen clients with department store credit card balances in the thousands. “I look at her and go 'How are you buying $2,800 worth of clothes?'” he adds.

Sanford recommends that consumers considering a retail card apply only at stores where they regularly shop and if they can get a substantial amount of savings. “Don't get credit for the sake of saving $15,” he says.

3. Exposing you to potential identity theft.

Having lots of credit cards open and not checking your statements closely is a prime environment for fraudsters looking to steal your identity.

“If somebody were to steal that information, you might not realize it because you're not opening the statements anymore,” Hoffman says.

Keep tabs all on your credit card statements and set up alerts so you can stay informed about unusual activity. And don't forget to update your mailing address when you move.

Bottom line: Be judicious about opening new credit cards and stay on top of your card's activity to avoid debt and detect potential fraud. Card churning will only reap benefits if you are careful.

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