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Credit Card Churning – The Good And The Bad

woman with a laptop and holding a credit cardThere’s hardly a day goes by without a credit card offer showing up in our mail. They all say I’ve been preapproved; all I have to do is mail in the application and I’ll soon be able to start earning 2x cash back, airlines miles or points I could use to buy myself an exciting gift.

Those mouth-watering rewards card offers can be hard to resist. I mean, who doesn’t want to earn 2x cash back or airline miles for a great vacation?

If you’re receiving these rewards card offers and are tempted to sign up for a bunch of new cards, there are two things you need to know.

Pre-approved doesn’t mean you’ll get the card

First, just because you’ve been “pre-approved” for a credit card doesn’t necessarily mean you’ll actually get the card. Pre-approved only means that the bank’s computers have accessed your credit score and that yours is high enough that you may qualify. But when you send in your application, the card issuer will take a much harder look at your credit history. One of the most significant factors for lenders is your debt-to-available-credit ratio. This is the amount of credit you have available or your total credit limits vs. the amount you’ve used. For example, if you have total credit limits (total credit available) of $15,000 but you’re carrying total balances of $4,000 (your total credit card debt), you’d have a debt-to-available-credit ratio of 26%, which credit card issuers would look upon very favorably.

On the other hand if you have total credit available of $15,000 and total balances of $7500, your debt-to-available-credit ratio would be 50%, which would be considered too high. So you might have a good credit score but wouldn’t get that new rewards card because the card issuer might see you as too big a risk.

Credit card churning

Do you ever apply for credit cards just for the sign up bonuses they offer? This strategy of signing up for numerous cards in order to get multiple sign-up bonuses is known among credit card enthusiasts as ”credit card churning.” And true credit card devotees will go so far as to sign up for a credit card multiple times just to get the same sign-up bonuses over and over.

But is this a good idea and, more importantly, what would it do to your credit score?

To begin with, credit card churning is not easy. You must first find the cards that offer the best sign-up bonuses, apply for them and be approved. And as noted earlier in this article you will need to have a very good credit score. The credit card issuers generally look at credit scores in ranges as follows.

• Between 700 and 850 – Very good or excellent credit score
• Between 680 and 699 – Good credit score
• Between 620 and 679 – Average or OK score
• Between 580 and 619 – Low credit score
• Between 500 and 579 – Poor credit score
• Between 300 and 499 – Bad credit score

If you have a credit score of 700 or better you’d probably qualify for just about any credit card available. Conversely, if your score is lower than 619, you might have a hard time getting a great new card – unless you have a very good debt-to-available-credit ratio or some other positive factors in your credit history.

Read the terms and conditions

Your second challenge – if you were able to get all the cards you applied for – is to understand each one’s terms and conditions. Many of those rewards credit cards require that you spend some minimum amount of money within a certain amount of time before you qualify for their sign up bonuses. As an example of this, one of the credit cards from Chase offers applicants a bonus of 40,000 bonus points but not until you’ve spent $3,000 within three months from the time you opened the card.

Not so fast

Some of the credit card issuers have caught on to the practice of churning and are now limiting the number of times that a person can get the same sign-up bonus. For example, many American Express credit card offers now state that if you currently have one of their cards, “you may not be eligible for this bonus offer.”

The biggest problem with credit card churningman holding multiple credit cards

The biggest problem with rewards credit cards is that you must spend money in order to earn the rewards. Go back two paragraphs and read again what you have to do to earn 40,000 bonus points on that Chase card. You have to spend $3,000 within three months. You must be very good at controlling your spending when using credit cards to earn sign-up bonuses. Rewards cards generally have higher interest rates than those that don’t offer rewards. If you were to start building up big balances – a 4higher interest rates – you could soon be facing a mountain of debt. In fact, if you have a hard time managing your finances, you’d be much better off getting a credit card with the lowest possible interest rate and leave those rewards cards alone.

Damaging your credit score

Another risk of credit card churning is what happens when you apply for multiple cards. This will go on your credit report and will lower your credit score. Most experts say that every time you apply for credit, it “dings” your credit score by anywhere from two to five points. If you were to apply for 10 cards your score would drop by at least 20 points, which could cause your score to go from “Average” to “Poor.”

Worse yet, is what happens if you were to run up big balances on some of those cards making unnecessary purchases just to earn bonuses and were then unable to make your payments on time or were even forced to miss a payment. In this case, your credit score would drop dramatically – making it difficult for you to get a mortgage or buy a car. You would probably also have to pay more for your utilities, your car insurance and even for your house or apartment if you rent.

On a brighter note

The up side to getting multiple rewards cards is what this would do to your debt-to-available-credit ratio. Go back to our earlier example of $15,000 in credit available and total balances of $7500, yielding a debt-to-available-credit ratio of 50%. If you were able to qualify for new cards with a total of $10,000 in credit available, your debt-to-available-credit ratio would drop to 30%, which would be much better for your credit score.

What you can’t fix

Your credit score is made up of five components. We’ve mentioned two of them – your debt-to-available-credit ratio and credit applications. The third and the one that accounts for 35% of your credit score is payment history or how well you’ve handled credit. This can’t be changed because, well, history is history. So if you want to have and maintain a good credit score it’s important to always pay your bills on time and try your best to not carry any balances forward from month to month.

Should you churn?

Some financial advisors say it’s unfair to take advantage of credit card issuers by signing up for cards just to earn bonuses and those generous rewards. However, others say “all’s fair in love and credit cards” and if you can qualify for those cards why not go for it? After all, the card issuers could always choose to limit or restrict their offers. If they don’t, you shouldn’t feel guilty about taking advantage of them. Plus, you’re giving those banks the opportunity to earn your loyalty. If they treat you well and you continue to use their cards long after you’ve earned the bonuses you’ve gone from a churner into a long-time customer. And that would be a win-win situation for both you and the banks.

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