Credit card companies are offering incredible sign up bonuses to add new customers, and “churners” are capitalizing on this by signing up for the new cards. While churning is gaining popularity, there are many disadvantages of credit card churning to keep in mind.
If you don’t pay down your entire balance, you could end up spending thousands of dollars in interest. Aside from the interest penalties, your credit score could also take a hit if you don’t plan accordingly. Finally, your bank could shut down your entire relationship if you get too aggressive with their credit cards.
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Here are the disadvantages of credit card churning. By keeping these in mind, you’ll join the envious club of churning success stories while avoiding the consequences.
You Don’t Pay Down Your Entire Balance
There’s a reason why credit card companies offer such compelling sign up bonuses. Interest rates for credit cards average 15% – 25%, and the rates can get even higher.
25% of anything can add up. A $5,000 outstanding balance will cost you $1,250 per year in interest. Any sign up bonus you make on a credit card will vanish if you don’t aggressively pay down your balance. Make sure you pay credit card balances off in full before investing in your hierarchy of savings.
If you don’t have a credit card, dip your toe in the water and start with one. Build a habit of paying down that credit card every month, and track how successful you were. Paying interest and late fees is one of many disadvantages of credit card churning.
Your credit score will increase while you build this muscle. As your score increases, more lucrative cards will be available for you. It’s worth the wait!
Your Finances Aren’t Organized
Credit cards require monthly payments, and late payments will be subject to interest and late fee penalties. Being late on a $3,000 payment could lead to well over $100 in interest and late fees.
Auto pay will fix this, and is a financial no-brainer. I was too stubborn to add this in my twenties, and it definitely led to over $100 in interest and late fees. These can be negotiated, and I successfully managed some of them, but it’s better to just not be in that position.
Aside from paying your bills, you need to keep track of your credit cards and when you applied for them. Chase, for example, will not approve anybody who has applied for more than 5 cards from any bank within a 24 month window. This is commonly known as the 5/24 rule.
If you apply for a card that you’ll automatically be declined for, your credit will take a hit without realizing any value. Each credit inquiry dings your credit score regardless of whether you’re approved for a card. Therefore, make sure you apply for cards that you have a likelihood of being approved for.
You Have a Great Banking Relationship
Credit card churning is getting more popular, and banks are catching on.
Chase, for example, has started shutting down entire banking relationships for credit card churners. This can be a major headache if your brokerage and banking relationship is also with them.
You have two options if all your financial eggs are in one basket.
- Diversify – move your brokerage account to one firm, retirement with another, etc.
- Don’t apply for credit cards through your primary bank
I personally recommend diversifying your financial relationships. Banks charge crazy fees for their brokerage and retirement products. You’ll find much better deals outside of banks.
You Have No Plan to Hit Minimum Spends
All credit cards require you to spend a certain amount of money to get your monthly bonus. The range is typically between $2k – $5k.
Do you have a plan to spend all that money? If not, you’ll miss your one shot of getting a bonus with that credit card. Credit card companies will not help you out by extending the timeline or lowering the spend threshold.
These spend threshold aren’t for everyone. The average person makes $48,150 per year in the United States, which is $4k per month in income. If you sign up for a new card with a $5k spending threshold every month, you won’t have much left over for your mortgage or rent.
Conversely, make sure to capitalize on big life events like moving or a wedding. You’ll be spending the money either way, why not get free travel out of it?
Your Credit Score is Below 725
Credit scores are your financial reputation, and they should be treated just like your personal reputation. They take a lot of work to build up, and are easy to bring down.
If you apply for credit with a low score, you’ll be declined and your score will drop even further thanks to the hard inquiry. This means you’ll have to wait even longer to apply for the next card, which is a big disadvantage of credit card churning.
Sign up for Credit Karma before you start applying. They have a great section showing which cards you could be approved for and probability. More lucrative bonuses and cards will be available as your credit grows.
The Disadvantages of Credit Card Churning – The Bottom Line
Credit card churning is a great way to save money on travel, and can help you live frugally without being cheap. Card companies are in an arms race to add customers, and are offering amazing bonuses to capture those clients.
With that said, there are many disadvantages of credit card churning. If you aren’t responsible with the cards, you could end up paying thousands of dollars in interest. Furthermore, signing up for too many cards can damage your credit score, or even lead to a bank shut down.
Finally, if you don’t meet the spend thresholds, you’ll earn nothing in bonuses from the credit card issuer. Always plan ahead before signing up for a card.
Stay organized with your cards, always set up autopay for your cards, and keep track of your credit score. Credit card churning is lucrative, and can improve your credit score if done the right way.