Thoughts on Credit Card Churning

People often ask how others are able to accrue so many miles and points so quickly without flying much. One of the ways to do it is by credit card churning.

Explanation of Churning

Credit card churning consists of the following steps:

1. Sign up for a credit card and obtain the sign up bonus (usually the first year fee is waived)
2. Cancel the credit card once you received the sign up bonus (usually cancel before the second year annual fee)
3. Allow the waiting period to pass and then sign up again for the same credit card

The result is that you will obtain multiple sign up bonuses for the same credit card, most often without incurring any annual fees. Even if you do pay the annual fee, it will only be for the first year and the sign up bonus is worth more than the fee.

Minimum Spend Requirement

We often aim to look for credit cards that earn us 1% to 2% on all purchases. Some credit cards offer 3% or even 4% on specific category spending; usually drug stores, gas, groceries and restaurant purchases.

When it comes to credit card churning, there is usually a minimum spend requirement that must be met within a specific period of time. For example, the TD Aeroplan Visa Infinite card had a promotion where the first year fee was waived, along with 25,000 sign up bonus Aeroplan miles if you spend $1,000 within the first 3 months.

In the example above, let’s say I earn 1 Aeroplan mile for all my spending, I would have spent $1,000 and earned 26,000 sign up bonus Aeroplan. Once I reach the minimum spending, I would be moving on to the next credit card to reach the spending for another sign up bonus.

I would not go on a shopping frenzy just to meet the minimum spend requirement. What I would recommend is to buy gift cards of stores that you frequently visit for routine spending, such as drug stores, gas, groceries and restaurants.

Credit Score

First of all, if you do not have the funds to pay for your credit card bills in full, I actually strongly recommend against having a credit card to begin with. It will only drag down your credit score by having one. Furthermore, the interest that you pay on the credit card bill will nullify any rewards that you may earn.

Another factor to consider is that every credit card application will lower your credit score by 5 to 10 points. By understanding how the credit scoring works, you will know that you can repair your score very quickly if you pay your bills in full and on time the following consecutive months. Furthermore, if you have a lot of credit limit available, it will help reduce your credit utilization ratio, which also helps your credit score.

If you are not applying for a mortgage any time soon, then you won’t have to worry about your credit score as much, so long as you pay your bills on time and in full. But if you plan to apply for a mortgage, I would take at least a 6 months break from credit card applications until you qualify for the mortgage, before going at it again.

Waiting Period

Every credit card company has a different waiting period before you can sign up for the same credit card. You will generally see 6 or 12 months waiting period before you can sign up for the same credit card again. The waiting period can vary from when you last cancelled your credit card or from when you last received the sign up bonus.

Either way, please read the fine print carefully. Some credit card companies may not even have a waiting period.

Going Forward

Credit card companies are aware of the practice of churning credit cards and I strongly suspect that they will slowly shut down credit card churning. American Express already took the lead by implementing a rule that only permits us to qualify for their sign up bonus once in our lifetime, unless you are referred by a friend. Even through the referral, there is a 6 months waiting period in between.

So if you have been thinking about churning I would do it ASAP while you still can. If and when there is a full stop to credit card churning, I will give my thoughts on other credit card strategies.