There are many strategies to maximize financial benefits from credit card accounts, most of which are positive with minimal negative impact. However, one strategy that can harm your credit report and score in both the short and long term is known as credit card churning. This practice should be approached with caution.
Credit Card Churning for Signup Bonuses
Credit card churning involves applying for and opening multiple new credit card accounts in a short period to earn the various introductory bonuses and rewards offered by issuers, without the intention of using the cards long-term. Once the churner meets the minimum spending requirements to earn the bonuses, they either close the accounts or stop using them.
Downsides of Churning
While churning can be an effective way to earn rewards, it can also lead to several significant issues that may outweigh the benefits:
- Impact of Hard Inquiries
- Each credit card application results in a hard inquiry on your credit report. These inquiries remain on your credit report for up to 24 months and can slightly lower your credit score. Credit scoring models consider hard inquiries from the past 12 months, so their impact, although minimal, can last for a year.
- Even after 12 months, lenders can still see these inquiries for up to 24 months and may take them into account during the underwriting process.
- Negative Effect on Average Account Age
- Opening new accounts lowers the average age of your credit accounts, which is a significant factor in credit scoring models. A lower average account age can decrease your credit score.
- To maximize your credit score, your average account age should be around 15-20 years. Continuous churning makes it difficult to achieve this average, as new accounts consistently lower it.
- The impact of new accounts on your credit score is more substantial and longer-lasting than the impact of hard inquiries.
Should You Churn?
While there’s nothing illegal about frequently applying for credit cards, it can lead to a lower credit score over time. If you value credit card rewards more than your credit score, churning might be worth it. However, if you plan to apply for a mortgage or auto loan in the near future, it’s wise to avoid this practice.
From a financial perspective, a lower interest rate on a mortgage or car loan is generally more valuable than a few free flights earned from credit card bonuses. Therefore, it’s essential to weigh the potential rewards against the possible long-term impacts on your credit before deciding to churn.
