Frequent fliers aren't talking about butter or cream when they post about "churning" credit cards on personal finance bulletin boards. Churning is shorthand for the process of opening new rewards credit cards with the intention of cashing in on big signup bonuses, then moving on to other cards after a few months.
For instance, imagine that a travel rewards card offers two flights on an airline you rarely fly. As a new cardholder, you can earn those tickets by meeting a spending threshold during an introductory period, such as $3,000 over 90 days. After that, you spot a great credit card deal from another card issuer, offering a few hundred dollars in cash rebates when you meet that account's bonus requirements. Repeat the cycle often enough, and you could end up with travel rewards, enhanced reward program status and other rewards.
For years, "churners" bounced from account to account, often aided by fee-free balance transfer offers. Some of the most frequent credit card churners schedule a flurry of new applications every three months to maximize their rewards throughout the year. However, consolidation among credit card issuers and a change in attitude after the 2008 credit crunch has made the process a little harder to pull off, for a few reasons:
- "New" cardholder rules. Credit card companies use generous signup bonuses to lure new customers from their competition. Increasingly, we hear stories about churners who have been disqualified from rewards credit card offers because they previously cancelled an account with the same lender.
- Credit score impact. Applying for new credit can temporarily reduce your credit score. And even though your credit utilization percentage should be below 10 percent, too many recent accounts and too much available credit can make lenders nervous about your financial stability. If you're not worried about shopping for a mortgage or a car loan, you may be able to sustain a brief FICO dip in exchange for multiple signup bonuses. Most of us would probably prefer not to take such risks, though.
- Cash flow. Churning credit cards really only works if you never carry a balance on your accounts. You may find it tough to move enough purchases through your account to trigger big rewards.
With rules tightening up around credit card churning, some practitioners have turned to "gift card churning," which involves using rewards credit cards to load prepaid debit cards at retailers that multiply rewards points. Just remember banks can change the rules around rewards redemption at any time.