In this series, ‘The Churn’, I will examine the multifaceted aspects of churning credit cards, probably the quickest and most used way to get free flights and other travel credits fast.
Part 2: Impact on Credit
In Part 1, you will have learned the basics of churning. You know that it involves getting a number of cards, and quickly dropping them, and getting them again. Probably the biggest question I get when I talk about churning is: doesn’t this hurt my credit?
To answer that question, let’s explore the basics of your credit report.
Your credit report is a history of your credit activities. Whenever you apply for credit, get credit, default on credit, etc., that is recorded on your credit report. Almost all items report for a period of time, and after that time expires, that record will drop off your credit report. For example, defaults typically last for 7 years on your credit report, and credit inquiries for 2 years.
Going forward, I’m going to make an assumption that you are not defaulting or missing payments on your credit products. If you are, churning is not the game for you. It just doesn’t make financial sense, and even getting approved for future credit products becomes questionable. To play the churning game, you want good to excellent credit.
What do creditors care about when evaluating your credit report? There are number of important factors, namely: payment history, age of credit history, credit diversity, debt:credit ratio, and hard inquiries. The last two items debt:credit ratio and hard inquiries are the relevant items for churning.
Debt:credit ratio: Creditors care about the ratio between total debt to available credit. On your credit report, total debt is calculated by the closing monthly balance on credit products. That means even if you pay all your credit products in full every month, your debt load will show as >0. There are only two ways to have a 0 debt load: (a) not using a credit product at all in the month, and (b) paying your credit cards in full PRIOR to the monthly billing date. I would not recommend either of these strategies, as creditors actually want to see some debt, because they want to see that you’re using available credit products. Again, just because you have a debt load on your credit report does not mean that you’re paying interest, it just reflects your closing monthly balance on all credit products.
Available credit is calculated by the total amount of credit granted to you. Ideally, you want your monthly debt:credit ratio to be between 5-30%, with the lower being better, but try to keep it above 5%. When you churn, you are temporarily increasing your available credit. Assuming that your debt isn’t going up because spending remains stable regardless of available credit, getting additional credit is a positive factor for your credit report. Let’s look at an example:
In the first scenario, you have $10,000 of available credit. That can be available all on one card, or spread over a number of credit products. Your monthly debt load is $1000. In this scenario, your debt:credit ratio is 10%. Now, say you get approved for another card for $10,000 credit, your total available credit becomes $20,000. Because your spending isn’t increasing, that increase in available credit reduces your debt:credit ratio to 5%. Here, that increase in available credit becomes a positive factor for this credit report.
Note that you can have too much credit. Sometimes banks will decide you have too much available, and demand that you cancel a card in order to be approved for their credit product. When you churn, you’re cancelling the cards fairly quickly, so this shouldn’t be too much of an issue. Further, some lines of credit, especially professional lines of credit, might reduce their offering to you by the amount of available credit on other products (i.e. credit A only wants you to have a total availability of 100,000. So, if you have a 5,000 credit card, they might only offer you 95,000 on your line of credit).
Credit inquiries: Whenever you apply for a credit product, the creditor will place an inquiry onto your credit bureau with one or both of Canada’s credit bureaus (TransUnion and Equifax). There are two types of inquiries: soft and hard. Soft inquiries are generated whenever you ask for your own credit report, when a current creditor wants to “check up” on you, or for pre-approvals for credit offers. These inquiries do not hurt you at all, in fact, creditors can’t even see them (you can actually use soft inquiries to your benefit).
Hard inquiries are what hurt your credit report. When I ask a creditor for a product, that hard inquiry will damage my credit history by a little bit. A couple hard inquiries don’t matter. In fact, the damage caused by a hard inquiry only hurts you for the first six months, hurts less between 6-12 months, stops hurting completely between 12-24 months, and falls off your report at the 2 year mark.
Too many hard inquiries is probably the key thing that will hurt the credit card churner. There are, however, a number of techniques to limit the damage. First, try to do your churn in cycles, that is, apply for all the credit cards you want on the same day. This benefits you by being able to do a churn every 6 months, because you’re concentrating the damage instead of staggering it by applying on different days.
There is a belief that applying to credit products all on the same day improves your chance for acceptance because hard inquiries generate at the end of the day, so the other creditors you’re applying to won’t see the other applications you made on that day. Unfortunately, this is no longer the case. Hard inquiries now generate instantly. Though you might have some success if you apply for multiple cards at the exact same time (i.e., in two browsers). I’ve never done this, I’m just providing an educated guess that this might work.
Some credit card offers can be had by “upgrading” your current credit product with the issuer. Say you have the “bronze card” with DCTA bank, and then DCTA bank offers a 100,000 point bonus with the “diamond card,” the bank might allow you to convert your current credit line into the diamond card, get the bonus, all without getting a credit inquiry.
In the end, too many hard inquiries does hurt your credit, but it’s not too bad if you concentrate your credit applications, and if you limit your applications to credit products that are worthwhile.
In conclusion, I would suggest that you avoid a credit churn 1 year before applying to any major credit product (i.e., a mortgage). Unless you’re looking at one of these major products, you should leverage your credit to get free stuff by churning cards. Just be smart about your applications, and your credit will be fine.