Credit Card Churning

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There is a vast array of literature (mostly online) on the broad topic known as “credit card churning”, so this article will only serve as a brief introduction. Of course, one can use these concepts to increase income / save money with only a basic understanding, but for those who truly enjoy it and are willing to invest some time learning the details, the added income can be dramatic. The basic concept is this: when signing up for a rewards-earning credit card, the “signing bonus” is typically far more dramatic than the rewards earned thereafter. As an example, signing up for an airline’s credit card will typically earn you 25,000 to 50,000 miles (sometimes more) after spending a required minimum amount, but afterwards miles only accrue at 1 or maybe 2 miles per dollar spent. The idea then, is to sign up for as many rewards-earning credit cards as possible in order to obtain the signing bonuses, but doing it in such a way as not to ruin one’s credit score.

Many people today have a reflexive fear of credit cards, and certainly there is some reason for this – those who cannot use credit cards responsibly shouldn’t. Historically, credit has come with many more costs and strings attached, but in our day and age of fiat paper currency, zero interest rates, quantitative easing, etc., not only is credit readily available on the cheap, but in many cases lenders will pay YOU to borrow from them. This technique is limited to those with excellent credit scores (FICO 740+) who are financially responsible. Earning rewards is not worth it if you then carry a balance and pay interest – in order for this to make sense, you must pay your balance every month (unless you have an introductory 0% APR, in which case you’ll want to pay it off before the 0% rate expires). To begin, you’ll first want to get your credit score – both Credit Sesame and Credit Karma allow you to get a good estimate of your credit score on a monthly basis, and they will also track it for you for free, alerting you when potentially negative events happen. This is a great help, as it is not too unusual for there to be mistakes on your credit report, which you can then fix. Some estimate as many as 10% of credit reports have errors.

Once you’ve got your credit score, assuming it’s over 740, you can then begin exploring the world of credit card churning. If not, there are many free or paid services out there that can help you repair your credit score – it’s not as difficult as you might think. Now here is how you can “churn” without impairing your score: every time you apply for a credit card, the offering company will perform a “hard pull” credit inquiry to ensure you are trustworthy as a borrower. This results in a small hit on your credit score – anywhere from -2 to -5 off your score. With credit cards, however, if you apply for and are approved for multiple cards on the same day, this only counts as one inquiry as far as your credit score is concerned. You’ll want to space out your applications every 91 days in order to avoid being declined for too many recent inquiries. For a fuller explanation of the magic 91 day rule, see here.

Every 91 days, you’ll perform what is colloquially known as an “app-o-rama”, that is, applying for 3 – 5 cards on the same day. Over the course of the next 90 days, you’ll clear the minimum spending thresholds on each of those cards to obtain the bonuses, and then repeat the cycle on day 91 with new credit cards. Over the long run, you will see your credit score maintain the same level or (usually) increase slowly over time. This is because the small hits to your score from the hard pull inquiries are more than offset by the fact that you now have a larger available credit balance and are using a smaller percentage of it. This makes you appear more responsible to lenders, since it shows you can handle a large amount of revolving credit without succumbing to the temptation to use a lot of it in spending sprees.

Most people who use this technique use it to obtain free travel, and indeed, you can get much more bang for your buck if you accumulate miles and points for travel than if you simply stick with cash back, but for those like myself who aren’t interested in travel, you can still make a substantial amount of money via cash back. Many rewards networks also give points / miles which are highly fungible and can be redeemed for cash back or travel rewards with a large number of airlines, hotels, etc. Chase Ultimate Rewards points are a good example. What rewards networks are finding out is that it’s worth it to allow your points to be converted to other providers because it makes those points much more valuable in the eyes of consumers. As an example, when I travel for business, my preferred hotel vendor is Starwood Preferred Guest (SPG) because these points can be transferred 1:1 to almost any airline.

Let’s look at a real world example: in my first “app-o-rama”, I applied for the following three credit cards:

1. Chase Sapphire Preferred Visa

  • 40,000 point bonus after spending $5,000 in the first 90 days
  • $95 annual fee, waived for the first year

2. Blue Cash Preferred AmEx

  • $250 bonus after spending $1,000 in the first 90 days
  • $75 annual fee, not waived

3. Barclaycard Arrival MasterCard

  • 40,000 bonus miles after spending $1,000 in the first 90 days
  • $89 annual fee, waived for the first year

There are of course a whole host of other benefits and rewards that come with these cards, but for the sake of simplicity I’m just sticking with the signing bonuses, as these are usually the most significant. Over the course of the next 90 days, I cleared these spending thresholds (also helped by the fact that I had a large planned purchase within that timeframe) and collected the bonuses. Both the Chase Ultimate Rewards points and the Barclaycard miles can be used either for travel or for cash back, so the Chase points I cashed in, while I used the Barclaycard miles for some personal travel that I already had planned. As an added bonus, two of these cards came with introductory 0% APRs for the first 12 or 15 months, so I was able to simply make the minimum payments until the 0% APR expired without incurring any interest payments.

So over the course of 90 days, I essentially collected the equivalent of $1,050 in additional income. Each reward point can be conservatively valued at 1 cent each, but if you redeem for travel rather than straight cash back, you can usually increase that amount dramatically. For instance, if you’re collecting airline miles, a domestic round-trip flight might cost $400, but in miles would typically be around 25,000 miles. Hence, $400 divided by 25,000 miles gives a per-mile value of 1.6 cents, and it can get much better than that.

Finally, let’s consider how to handle annual fees. If you travel often, then many times the annual fees may be worth it, but in my case, they’re typically not. When it comes time to pay the annual fee, simply call the credit card company and request a cancellation. Sometimes, they will simply cancel the card for you, and you will take a small hit on your credit score because you’ll have less revolving credit to your name. In most cases, however, the call center agents are trained to try to keep you as a customer. In my case, when it came time to pay the annual fees, I simply downgraded my two Preferred cards to the standard or everyday version, which carries no annual fee (but also offers less rewards). In the case of the Barclaycard, my only option was to cancel. Even when you do cancel a card, however, there is usually an option to transfer the revolving credit to another existing card with the same company, so that your credit score doesn’t take a hit.

This is only a very basic introduction to the concept, but here are a few links for those who would like to explore the topic in detail:

  • Frugal Travel Guy has a great beginners’ guide to the basics here. He also offers free consultations on which cards you should get based on your goals; in return, he asks that you use the links on his site when you sign up for the cards so he gets a referral fee.
  • Another great beginners’ guide can be found at Million Mile Secrets. The founders of the site, a married couple, detail how they “enjoyed a $32,000 honeymoon in Paris for ~$2,000, paid only $60 for two ~$8,000 seats in a First Class plane suite, and stayed for free in a hotel suite that costs ~$3,500 per night!”
  • Mile Value also has a beginners’ guide available here, and also offers free consultations on which credit cards to sign up for given your goals.

Excited? You should be! Now get out there and start collecting your cash / free travel!

Logan Hertz works as a business strategy consultant in Atlanta and freelances as a personal finance expert. If you are interested in clever, easy ways to increase your income and reduce your costs, email him.

© 2015 Logan Hertz – permission to reprint is gladly given, provided the author is given credit

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