Numerous strategies exist to maximize the financial benefits of credit card accounts, most of which are positive with little to no adverse impact. However, a tactic known as credit card churning should be approached with caution due to potential harm it may cause to your credit report and score, both in the short and long term.

Credit Card Churning for Sign-Up Bonuses

Credit card churning involves consumers applying for and opening new credit card accounts within a short span to avail themselves of various introductory bonuses and rewards offered by issuers, without intending to use the card long-term.

Once churners’ credit card applications are approved and they meet the minimum spending requirements for sign-up bonuses, they often close the accounts or cease using them altogether. This practice can be likened to playing Russian roulette with credit, albeit effectively for some.

The Downsides of Churning

Applying for multiple credit cards to gain sign-up rewards can lead to numerous issues, potentially outweighing the benefits of the rewards. These potential pitfalls include:

Negative Impact of Hard Inquiries

Applying for multiple credit cards leaves a trail. Each application prompts issuers to pull at least one of your credit reports and scores, resulting in a hard inquiry on your report.

Hard inquiries remain on your credit report for up to 24 months, with credit bureaus legally required to keep a record of companies that have accessed your report. These inquiries can potentially lower your credit score, although the impact ranges from none to minimal. Credit scoring models consider hard inquiries from the past 12 months, so any effect, albeit small, can last up to a year.

Moreover, the fact that scoring models disregard inquiries after 12 months doesn’t mean they become irrelevant. Lenders can still see inquiries from 13-24 months ago and may penalize consumers during the underwriting process.

Negative Effects on Average Account Age

Applying and opening new credit card accounts will eventually be reported to credit bureaus. Unlike inquiries that only appear on the report pulled by the issuer, new accounts almost certainly show up on all three of your credit reports, likely immediately after opening and definitely within 30 days.

When new accounts are added to your report, they immediately become fair game for credit scoring systems. This means they become part of the scoring process the next time your score is calculated.

One specific metric in credit scoring systems that gets severely penalized by churning is the “average age of accounts.”

The average age of accounts refers to the average age of all credit accounts on your report, irrespective of their status. The calculation is simple: add up the age of all accounts and divide by the number of accounts. The more new accounts you add, the younger they appear, and the more severe the issue becomes. Achieving the highest credit scores requires an average account age nearing 15-20 years, a target unreachable with constant churning.

To Churn or Not to Churn?

While applying for credit cards willy-nilly isn’t illegal, it can lead to a long-term decrease in credit score. If credit card rewards outweigh the importance of your credit score for you, then proceed. However, if you plan to apply for a mortgage or auto loan soon, you might want to avoid frequent applications.

While I typically don’t give opinions on such matters, allowing adults to make adult decisions, from a financial standpoint, a low-rate mortgage or auto loan is obviously more valuable than a few free plane tickets.