Understanding the Concept of Credit Card Churning

Updated on: 14 Dec 2021 // 21 min read // Credit Cards
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Although initially many people were perfectly happy using a single Credit Card for all their purchases, the concept of signing up for 3 or 4 Credit Cards in a year is slowly but steadily gaining colossal prominence. People prefer this new style of using Credit Cards because it helps them take advantage of signup bonuses. This is known as Credit Card churning. Although a few individuals may not be aware of it, this process is a fairly common phenomenon in the world of personal finance. Here is everything you need to know to understand the concept and processes that revolve around Credit Card churning.

What Exactly is Credit Card Churning?

Theoretically speaking, Credit Card churning sounds like a relatively straightforward concept, but when it comes to putting it into practice; you may experience a few roadblocks. The trick lies in moving your regular expenses around between various Credit Cards. Fundamentally, it refers to making use of many cards that offer rewards. These rewards can be in the form of sign-up bonuses and airline miles. You need to spend the right amount of money if you want to avail the bonus. After you receive the bonus, you can either cancel the card, or you can keep it until the first-year free offer comes to an end.

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Series of Steps Involved in Credit Card Churning

To be eligible for sign-up bonuses, having a good credit score is imperative. Then, all you need to do is follow these series of steps which primarily includes:

  • Recognising and signing up for cards that provide exciting sign-up bonuses
  • Opening up as many of the cards as you can
  • Spending the minimum amount that is needed to activate the bonus
  • Cancelling the card after you have availed the bonus
  • Repeating the same process all over again

Doing this from scratch all over again helps churners gain enormous amounts of hotel points, airline miles, Credit Card Rewards and any type of additional bonuses that come with the card.

The Advantages of Credit Card Churning

There are many pros of Credit Card churning. Some of them include the following:

  • It is easy and comes with minimal risk involved:

    Credit Card churning is the easiest way to gain amazing discounts and bonuses. The cardholder does not need to possess any real skill. In addition to this, the process involves minimal risk. It offers a continuous flow of passive income that you can spend on hotels as well as your travels.

  • You can still maintain a high credit score:

    You can manage to carry out Credit Card churning and still keep up with a high credit score. Yes, there is no denying that opening new pathways for credit by purchasing a new card affects your credit score, this is a temporary impact. The bigger picture, which is the combined additional credit limits, works to minimise your credit utilisation ratio. Making sure that you are paying down balances regularly is imperative in this case.

  • It can prove to be a blessing when used wisely:

    People believe that you are going to spend money anyway so why not get rewarded for it. For each month, when individuals can pay their amount in full, they can stay away from burdensome interest payments on their debt. This process also helps you collect reward points more rapidly when compared to making your purchases through an old Credit Card or cash. This is not to say that old Credit Cards do not offer bonuses, they do, but new cards only provide the best and most amazing offers.

The Downside of Credit Card Churning

There are specific cons associated with Credit Card churning as well. Understanding these disadvantages helps you be aware and make an informed decision.

  • Being overzealous in your approach:

    Becoming too overenthusiastic and going overboard with your Credit Card purchases can land you in a bit of trouble. You need to keep in mind that Credit Cards have a tremendous interest rate. If you charge an exorbitant amount to your card and you fail to make a payment on time, you fall in trouble. Continuing to do this makes you lose out on credit.

  • You shift to a ‘spending mindset’:

    Since you have to reach a specific amount to qualify for a bonus, you may find yourself shifting to a ‘spending mindset’. If you are shopping for items you wouldn’t even think of buying but are nevertheless doing so because of maintaining the minimums then you are using Credit Card churning inappropriately.

  • Not considering your near-term financial goals:

    If you want to purchase a four-wheeler or a new house, it is better to avoid churning. This is because continually opening and closing credit accounts can make lenders skeptical about offering you a loan. You need to be on your guard and attentive when carrying out Credit Card churning. It does not take long for the outstanding credit card debt to reach staggering amounts. You need to be organised, disciplined and possess excellent organisational skills if you want to rise above outstanding debts and the constantly changing rules of Credit Card churning.

Also Read:  7 Things to Know Before Getting a Second Credit Card

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