Tuesday, 18 January 2022

Credit Card Churning: Pros & Cons

Credit Card Churning: Pros & Cons
31 Jul

Hey I'm Adam Jusko from ProudMoneycom and in this video i'm gonna talk about the pros and cons of credit card churning

But before I do that I would ask you to please subscribe to our YouTube channel if you have not already and if you have already I thank you for doing so So, before we go any further we should talk about what credit card churning is Credit card churning is basically the practice of moving from one credit card to the next in a very short time, getting the bonus on one credit card and once you've got that bonus basically either cancelling that card or putting it away off to the side and never using it using it again essentially, and then moving on to the next card, getting its bonus, putting it to the side or cancelling it, and then going on to the next credit card the next credit card and the next credit card It is called "churning" because you are doing it repeatedly — you're churning through all the credit card offers that are out there on the market so that you can get those big bonuses but not really having any intention to keep those cards as your everyday credit card So the attraction here is obvious: you know churn through these cards, you get the big bonus, you're going to be getting rewards at a much higher level than you would if you showed loyalty to one of those cards and you were using it over the long haul

A big bonus is going to give you a lot more bang for your buck up front then points or miles or whatever that you earn through your spending over the long haul So if you can kind of move from one to the next then credit card churning makes a lot of sense — it's all upside for you, or at least so it seems at the beginning So why would banks allow this? Why would they let you churn through all these credit cards Well, generally the way banks look at it is they put these big upfront offers out there spend five hundred bucks and you'll get $150 bonus or spend three thousand bucks and you'll get 50,000 miles or whatever that bonus is, because it entices you to come in and they've done the math on their end, they know that a certain number of those people are going to become the everyday credit card users who stick with that card over the long haul, and if it has an annual fee they're gonna pay that annual fee every year and they're gonna make it their everyday card

So in terms of the churners, they know you exist, they're not fooled by the fact that people are out there churning But they know that that is sort of part of the overall framework of what it takes to get the good new customers You're gonna deal with some of the churners along the way, so it's sort of a cost of doing business Even the bonuses themselves are a cost of doing business, you're sort of giving more than you're getting upfront, sort of what they call a "loss leader" in retail stores — you're giving something that you're actually losing money on in order to get people in, with the promise that you are probably going to make more money off of them in the long term So the bonuses are the same thing

Obviously having churners — they are all loss, they're going to take that bonus and they're not going to use the card anymore So the banks have caught on to this, they're not fooled by this necessarily Yes, some people get through for a while because a lot of the process is automated and if your credit score is good enough, you're just sort of going to be automatically approved So sort of in the early days that works But as you go on, the banks have a lot of "stops" in place to catch people that are regularly moving through their cards

It used to be you could easily move from one card to the next and there was no problem Now you might have a situation where a card if you cancel it, you can't get that card again for a period of two or three years

Probably the most "famous" sort of guard against credit card churning is Chase's 5/24 rule, which basically means if Chase sees that you have opened five credit cards in the last 24 months, they're not going to give you another one And that's not just five Chase credit cards in the last 24 months, it's five credit cards from any any bank issuer — so once you get there, they're gonna cut you off, and it doesn't matter if your credit score is good They see you as a churner, they see you as someone who's probably not going to become an everyday customer if they give you a new card, right? So credit card churning is not illegal, it's not immoral, there's no there's nothing that is bad about it intrinsically from a consumer's point of view But there are dangers in doing it And probably the biggest one is you can hurt your credit score, your credit history Every time that you open a new credit card, you are getting a little ding on your credit score You're opening another line of credit and over time when you open more and more lines of credit your credit score goes down

If you have a really great credit score maybe that doesn't hurt you as much, but if you have sort of an intermediate credit score or your credit's not that good, every time you try and get a new credit card you are hurting your credit score a little bit Now the next danger is that banks may not only deny you for new credit, they may shut down all of the credit cards that you have with them They may see that you really aren't someone who is a potential good customer for them You're just someone who's sort of selfishly trying to get what you can get and then moving on to the next opportunity So you can get yourself in a place where the banks don't want to do business with you anymore, and there's no reason for them not to just cut off your credit cards altogether

And the third thing I would say is that when you do credit card churn, when you get to these limits, say the Chase 5/24 rule, you then are in a situation where say a really awesome bonus opportunity does come up if you've just been churning through and you don't really care what's going on, you just take in whatever you can get as fast as you can get it, it's a possibility that a really awesome bonus opportunity could come through and you no longer qualify for it because you have done too much in order to try and get your rewards in the past So, the bottom line is that credit card churning is someone with good credit it makes sense to try and get those bonuses and it obviously it can be very lucrative, but you have to be careful You have to make sure that you're not doing it too often And also if you have sort of average credit or not great credit, you have to be careful of your credit score And also if you are someone that is going to be going after sort of important loans in the future — in particular, mortgages, but auto loans as well, you don't want to have all these newly open credit lines on your credit report So you also have to be careful not only of the churning itself but when you are doing that churning in relation to when you may need to look good for the banks when you are going for something that is very important to you financially

So, that is it Thanks for watching Please go to ProudMoneycom where we talk about other personal finance topics and we do credit card reviews and all sorts of other fun stuff too Thanks for watching


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