Travel hackers, or credit card churners, use credit cards as a tool to get free or heavily reduced fares on flights and nights at hotels. Churners apply for several credit cards at a time to capitalize on the rewards. But while these churners are happily galavanting around the world, are their credit scores suffering?
What is credit card churning?
Credit card churning is when you sign up for multiple cards to get the signup bonuses, hit the spending requirement for these bonuses, and then possibly cancel the cards if the ongoing rewards don’t meet your particular needs. Churning is generally used by travelers looking to score free flights, hotel nights and other travel rewards.
People with reservations about churning worry it will decrease their credit scores. Let’s discuss how your FICO score is calculated, and how churning affects the different factors that make up your score.
How your FICO score is calculated
Your FICO score is calculated using five factors — payment history (35%), credit utilization (30%), length of credit history (15%), types of credit in use (10%) and new credit (10%). Churning credit cards will affect most of these factors.
Provided you make all of your payments on time and pay your balance in full each month (or at least keep your revolving credit low), churning won’t hurt your payment history and won’t cost you anything in interest. However, it could affect your credit utilization ratio, because many credit card issuers impose minimum spending requirements within a short period of time to get the signup bonus.
The average age of your credit accounts will be take a hit when you open new cards, but you can mitigate this by keeping a few “oldie-but-goodie” cards open for a long time. Opening new accounts and promptly closing them will also damage your credit score because of the new credit penalty, which temporarily lowers your score until the account has been open for a year.
If you choose to churn credit cards, understand the following:
- A long credit history is your best friend. Having a long credit history means new credit won’t affect your average age of credit accounts as much, so the credit score points you lose will likely be immaterial. Which brings us to the next point …
- A perfect credit score and an excellent credit score carry the same terms. While it would be awesome to say you hit the perfect 850 FICO score, for all practical purposes, it isn’t necessary to get the best credit terms — like the most preferable interest rates, etc. If your score lies between 720 and 850, you have an excellent score. Along with an excellent score comes excellent terms. The point is, a long credit history will mitigate your chances of hurting your credit score much. And even if your score drops a few points, you’ll still receive the best terms if it exceeds 720.
Should you churn credit cards?
If you have a reasonably long credit history and an excellent credit score, you don’t necessarily have to worry about losing a few points. If you don’t have an excellent credit score, but still have a good score, churning could work for you as well. Just remember, your score probably won’t rise to the excellent level if you churn heavily.
Churning has its downsides. Besides the new credit penalty, there are a few more disadvantages.
- Issuers could ban you from applying for new credit. Credit card issuers are well aware of the existence of churning and they may choose to ban you, either temporarily or permanently, from applying for credit cards or receiving signup bonuses.
- Credit card management can be overwhelming. It can be difficult to manage multiple credit accounts, and there is always the risk you’ll miss payments or overspend in order to hit spending requirements to receive bonuses. The fewer cards you have, the fewer cards you have to make payments on and the less effort you have to exert chasing credit card signup bonuses.
- Each new account will shorten your average account age. This is why it’s risky to churn without a long credit history. For instance, if you have one credit account you opened five years ago and decide to open one more account today, your average credit age will decrease to two-and-a-half years. This is a significant drop and will likely hurt your credit score.
- Closing accounts can increase utilization. If you carry revolving debt, closing credit accounts will increase your credit utilization, possibly decreasing your credit score. Let’s say you have one previous credit card with a limit of $5,000 and a balance of $3,000, and then you churn a credit card with a limit of $5,000, but don’t carry a balance. In this case, you are currently utilizing 30% of your credit ($3,000/$10,000), which most experts say is acceptable. However, if you close the second account, your utilization is now 60%. This is high enough for potential creditors to see you as a risk, so your credit score will likely drop.
So should you should churn credit cards or not? The decision is completely up to you. Just don’t say we didn’t warn you about the downsides.
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