Is Credit Card Churning a Smart Idea to Run Away From?

So What is Credit Card Churning?

Credit card churning is the process of taking advantage of credit card points, perks, and rewards in a structured, organized, and clever way to benefit you.

These rewards might be for:

  • cashback
  • hotel stays
  • airline tickets
  • use of certain facilities like airport lounges
  • preferred boarding
  • access to special deals like concert tickets
  • concierge services
  • discounts
  • gift cards
  • rental car insurance coverage
  • extended fraud insurance
  • price comparisons and refunds
  • 0% balance transfer offers (there’s a catch)
  • upgrades for hotels and transportation
  • free airline tickets for companions.

There is no doubt that the idea is attractive, and we’ve certainly heard stories of people applying for a lot of cards to get maximum benefits. There are even websites geared towards credit card churning activities.

But is Credit Card Churning a Smart Idea?

Like everything else in life, the answer is maybe.

Some downsides can impact your credit negatively.

For example:

  • multiple inquiries reported on your credit report
  • too much available credit or lender risk exposure that can reduce your credit score
  • running up debt just for low-value perks
  • becoming disorganized and getting hit with expensive annual fees
  • not meeting minimum spending requirements to earn bonuses
  • lowered credit score can restrict access to other best rates for mortgages
  • other items can become more expensive with a lower credit score, like car insurance.

Before You Start Churning Credit Cards

It would help if you thought about some questions before starting to play creditors at their own game.

  1. Am I organized enough to keep track of multiple card requirements at the same time and not miss critical deadlines?
  2. Will the benefits I gain from credit card churning outweigh the downsides and risks to me?
  3. Can I keep a close eye on multiple open credit card accounts to spot fraud and incorrect charges?
  4. Will the administrative pain of changing credit cards on multiple different purchases be worth the eventual “potential” benefit?
  5. Am I willing to accept that churning credit card can reduce my credit score?
  6. Are the benefits I will potentially earn from playing the credit card game items I will actually use?

Each person has a money personality that guides them to relate to money, credit, and debt. Some people are very organized while others live life with less structure.

You can take my online test and find out what your money personality is.

If you are not someone with great attention to detail, credit card churning can hurt you more than help. You can wind up with more debt over more cards and steep fees if you don’t cancel the cards before the critical date.

Tax Liability of Credit Card Churning

It’s complicated. The answer is you might be responsible for paying income tax on some credit card rewards you earn or are given.

For example, the IRS considers cashback and travel points earned as a rebate, not taxable. However, if you a given a perk for opening a card, then with no requirement on your side, then the perk can be taxable.

For example, if you receive a signup bonus and are not required to do anything to earn or receive it, then the odds are the IRS may consider that income and thus taxable.

Like everything else tax-related, it’s a smart idea to talk to a tax advisor before making any assumptions either way.

What to Look for in a Credit Card Worth Churning

The bottom line of what to look for comes down to what rewards I am actually likely to use. It makes no logical sense to earn a bunch of points you will never redeem. That strategy reminds me of the people who fall all over coupons and buy lots of stuff they never use. What’s the point?

So I’m not a fan of credit cards that earn airline reward points that are only good on one airline or have restrictions. I want to be able to use rewards when I need to travel.

Credit cards where you can use the points in an alternative way are attractive. A card that earns you free nights at a hotel chain but can be redeemed for Amazon purchases or gift cards is smart. That way, you are not locked into one form of redemption.

The benefit you earn must be worth the effort. Cashback is not a great reward in general. Just yesterday someone asked me if they could use a cashback credit card to earn enough money to buy a car.

You’d have to run $750,000 through a credit card to earn $15,000 in cashback rewards on a 2% cashback card. Ultimately it would be cheaper to purchase the car than have to run that much through a credit card.

And while you are thinking about using a credit card to pay for everything to earn rewards, not all purchases qualify or make sense. It makes no sense to use a credit card to earn cash back when you have to pay a higher percentage to pay by credit card.

If you put a charge on a credit card at a casino, a cash advance, or a balance transfer, that will probably not count towards required spending on a card to earn a reward.

This is where your killer planning skills are necessary. Let’s say you apply for two different reward cards at the same time to reduce the odds that multiple credit inquiries will impact your ability to qualify for the card.

Both cards may require you to spend $5,000 on the card in the first three months. That means to get the full introductory rewards; you’d have to run $10,000 through two cards in three months. Can you really do that?

Let Me Get Personal

Here is a good real-world example.

I happen to have a credit card that earns me free nights at hotels. The steep annual fee was worth it. I was doing a lot of traveling and was not paying for hotels at all. That was a real benefit I could use. Then the pandemic hit, and I stopped traveling and staying at hotels.

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The card also gives me an annual allowance for ride-sharing expenses. And guess what I’m not doing during the pandemic, that’s right, ride-sharing trips.

Because I could use the benefits in other ways, I started using them to make purchases on Amazon, but I don’t benefit as much if I use points that way since the free hotel stay uses fewer points for more cost than I would have otherwise had to pay.

The card company also has a portal to make online purchases where you get additional points back if I can only remember to use it. And here is another issue to consider. If I make a purchase on Amazon and get free shipping, is it worth checking the online credit card company portal to make a purchase for a point bonus but not get free shipping?

In general, a credit card reward point is worth about a penny. So if I make a purchase through the online portal and earn an extra 1,000 reward points and shipping is $12, I’ve actually lost $2 in the transaction.

For me, dealing with just this one card is a chore to remember when to use this card over another in my wallet to get maximum benefits. And if my travel is going to be limited in the foreseeable future, the annual fee might not be worth it.

I can’t imagine trying to stay organized on five or ten cards to make it worthwhile to apply for many cards and churn them to maximize rewards.

Oh, and here is one more thing to think about, you can work hard to earn a lot of reward points on a credit card and lose them if the company discontinues its reward program, goes bankrupt, or merges with another company.

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Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
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