What Is Credit Churning and How It Affects Your Credit

Credit card rewards programs have become increasingly popular, offering various incentives for new cardholders. This has led many individuals to explore strategies for maximizing these benefits. Among these approaches, a practice known as credit churning has gained attention for its systematic method of acquiring and leveraging introductory offers.

Defining Credit Churning

Credit churning involves the systematic process of opening new credit card accounts primarily to earn welcome bonuses, rewards, or other promotional offers. This practice distinguishes itself from typical credit card usage, where a card is obtained for long-term spending and credit building. The core idea behind churning is the repetitive acquisition of these introductory incentives.

This approach often entails a cycle of applying for a card, fulfilling its initial bonus requirements, and then deciding whether to close or downgrade the account before incurring annual fees. The repetitive nature of this cycle, often across multiple card issuers, is what defines “churning.” It differs from simply applying for a new card as needed; instead, it is a strategic pursuit of new cardholder benefits.

The Mechanics of Credit Churning

Credit churning begins with researching available credit card offers, focusing on those with substantial sign-up bonuses. Once a suitable offer is identified, an application is submitted to the card issuer. Upon approval, the next step involves meeting the card’s minimum spending requirement to qualify for the advertised bonus. This requirement often ranges from $1,000 to $5,000, usually within the first three to six months of account opening.

To achieve this spending threshold, individuals might shift all their regular expenditures, such as groceries, utilities, and daily purchases, to the new card. Some may also prepay recurring bills or cover group expenses, ensuring reimbursement from others, to meet the requirement. After the bonus is successfully earned, the account management phase begins. This may involve keeping the card open, downgrading it to a version with no annual fee, or closing it entirely, particularly before any annual fees are assessed.

Common Motivations for Credit Churning

Individuals engage in credit churning to acquire significant financial benefits offered as incentives for new cardholders. The most common motivation is the pursuit of substantial sign-up bonuses, which can include large sums of points, miles, or cash back. A single welcome offer from a premium travel credit card, for example, might yield hundreds or even thousands of dollars in equivalent value.

These points and miles can be redeemed for valuable travel perks, such as free flights, discounted hotel stays, or access to exclusive airport lounges. Beyond travel, cash back bonuses provide direct financial returns that can be used for any purpose. Some cards also offer credits towards specific services like streaming or dining, further enhancing their appeal.

Key Considerations for Credit Churning

Frequent credit applications can lead to multiple hard inquiries on a credit report, which may temporarily reduce a credit score. Each hard inquiry remains on the credit report for up to two years, although its impact on a credit score diminishes after 12 months. The average age of accounts (AAOA), a factor influencing credit scores, can also be lowered by opening many new accounts. AAOA can constitute between 15% and 21% of common credit scoring models.

Credit card issuers implement various policies to manage churning. These policies include limitations on bonus eligibility, such as offering a bonus only once per product line or imposing waiting periods of 24 to 48 months between bonuses for the same card or card family. Some issuers also have rules that deny applications if an individual has opened a certain number of accounts across all issuers within a specific timeframe, such as five or more credit card accounts in the past 24 months. Issuers may deny future applications, close existing accounts, or forfeit accumulated rewards if they suspect a violation of their terms and conditions.

Successfully engaging in churning requires diligent management of multiple credit accounts. This includes meticulously tracking spending to meet minimum bonus requirements, monitoring due dates to avoid late payments, and managing annual fees. Failure to pay balances in full to avoid interest charges can quickly erode the value of any earned rewards.

Legality of Credit Churning

Credit churning is not illegal. The practice operates within the established terms and conditions set by credit card issuers. While card issuers may implement rules and take actions, such as denying applications or closing accounts, if they identify systematic churning behavior, the act of applying for and managing credit cards to earn bonuses does not violate any laws.