Are you enticed by the lucrative deals, bonuses, and rewards offered by credit card companies? If so, you may be tempted to open and close credit cards repeatedly to enjoy those perks. While it sounds tempting, it's crucial to understand the potential consequences of such a strategy. In this article, we'll dive deep into the world of credit card churning – opening and closing credit cards for rewards – and analyze if it's a savvy strategy or a damaging move for your financial health. Get ready to dive into the details and uncover the benefits and risks involved in this tempting practice.
Is It Bad To Open And Close Credit Cards For Rewards Table of Contents
The Strategy of Credit Card Churning
Credit card churning is the practice of opening credit cards to get sign-up bonuses, rewards, or cashback, and then closing them before incurring any significant costs. Done right, churning can lead to massive reward points and travel benefits. However, several factors impact this practice, including:
Impact on Credit Score
Opening and closing credit cards frequently can hurt your credit score. Credit utilization and average age of accounts are two critical aspects of your credit report that may be negatively impacted, resulting in a lower score. Maintaining a healthy credit score is vital for securing loans, insurance, and better interest rates in the future.
Credit Card Company Rules
Many credit card issuers have implemented restrictions on how frequently customers can apply for and receive welcome bonuses. For example, Chase's "5/24 rule" states that you cannot be approved for a new credit card if you've opened five or more cards within the past 24 months.
Annual Fees
If churning isn't done carefully, annual fees and other costs can offset the rewards earned. While some cards waive annual fees for the first year, keeping multiple cards open for longer periods can lead to hefty fees.
Organizational Effort
Churning requires a considerable amount of organization and planning. You have to keep track of multiple cards, spending requirements, and bonus deadlines to reap rewards without incurring unnecessary expenses.
Weighing the Pros and Cons
Now that you know the potential impacts and risks of churning, it's time to weigh the pros and cons.
- Pros: Churning can lead to significant rewards – including points, miles, or cashback – if done correctly. These rewards can help save money on travel, purchases, and experiences.
- Cons: Doing it recklessly or without proper organization can adversely impact your credit score, impede getting new cards, incur annual fees, and limit future financial opportunities.
Deciding if churning is a good idea depends on each individual's financial goals, current credit standing, and ability to manage multiple credit accounts responsibly.
Is It Bad To Open And Close Credit Cards For Rewards Example:
Imagine Sarah, who's eager to save on her annual vacation. She decides that opening travel reward cards to gather bonus points is a great strategy. She opens two new credit cards with generous sign-up bonuses and low spending thresholds. Once she has met the spending requirements and earned the bonus, she decides to close both accounts to avoid annual fees.
Following this strategy, Sarah reaps rewards on her vacation. However, her credit score takes a hit as her average age of accounts decreases and her credit utilization ratio increases. If Sarah continues this approach, she may find it harder to get approved for loans or receive better interest rates in the future. Additionally, frequent churning may make it difficult for her to obtain new credit cards with attractive rewards and bonuses due to credit card issuers' restrictions.
While opening and closing credit cards for rewards seems lucrative, it's critical to understand the potential consequences on your credit score and future financial opportunities. Before jumping into the credit card churning game, carefully weigh the pros and cons and consider if it's the right strategy for you. If you're interested in learning more about personal finance and smart money-saving strategies, be sure to check out other guides on Flik Eco. Don't forget to share this article with your friends and family who may be considering this strategy. Remember, knowledge is power when it comes to managing your finances!
