Can Credit Card Churning Hurt My Credit Score in Canada?

Credit card churning can hurt your credit score if you’re not careful. That’s because credit card churning is the act of frequently applying for new credit cards just to get generous welcome offers. Then you cancel the card before the annual fee is due. Not only does the practice subject you to multiple hard credit checks, but it can also impact your score in less obvious ways. Here’s how credit card churning can hurt your credit score and tips to do it safely.

5 Ways Credit Card Churning Can Damage Your Credit

In many cases, you are required to spend a certain amount of money on the card to qualify for the offer. While the financial rewards can be significant, there are also risks to consider. Below are 5 ways credit card churning impacts your credit:

1. Hard Credit Checks

Every time you apply for a new credit card, the issuer will perform a hard credit check to determine your creditworthiness. This is recorded on your credit report as an inquiry. This type of inquiry can cause a temporary drop in your credit score by a few points, regardless of whether the application is approved or declined. This means that even a declined credit card application following a hard check can negatively impact your score.

2. Average Age of Credit History

Credit scoring models look at the age of each account and the average age of all your accounts. Older accounts have a positive impact because they provide a longer history of managing credit. Regularly opening and closing credit card accounts can reduce the average age of your credit accounts. Lenders tend to favour borrowers with longer, more stable credit histories because they’re less risky borrowers.

3. Credit Utilization Ratio

When you get a new credit card, the overall amount of credit you have access to increases. This can initially lower your credit utilization ratio, which is a measure of how much credit you’re using compared to how much you have available. Usually, this is a good thing for your credit score because low balances relative to the credit limits tell potential creditors that you are not overly reliant on credit.

4. Debt Management

Minimum spend requirements also put you at risk of taking on more debt than you can manage. If you’re not able to pay the balance off in full each month, the interest charges negate the financial benefits of the welcome bonus and other rewards. Plus, sky-high interest rates can make it extremely difficult to pay down the balance and get out of debt. This can impact your budget and lead to financial distress.

5. Payment History

While credit card churning doesn’t directly affect your payment history, it can make on-time payments a challenge. With multiple cards to keep track of, you’re at greater risk of missing a payment. Even a single missed payment can negatively affect your credit score. Multiple missed payments can lead to a significant drop in your credit score and remain on your credit report for up to seven years. Spending too much on the cards can also lead to missed payments if you become overindebted and cannot keep up with minimum payments.

How to Churn Credit Cards Without Hurting Your Credit Score

Credit card churning offers a tempting array of rewards and bonuses. However, without a well-thought-out strategy, this practice might put a dent in your credit score. Here are some tips to help you maximize benefits while protecting your financial reputation.

1- Plan Your Applications?Carefully

Research each card’s qualification requirements and potential benefits. Ensure you meet the credit score and income criteria to avoid declined applications, which can negatively impact your score. Instead of applying for several cards simultaneously, consider spacing out your applications. This approach minimizes hard inquiries in a short period and offers you time to manage each card’s spending requirements effectively.

2- Understand the Terms & Conditions

Carefully read the terms and conditions for each credit card’s welcome bonus and reward structure. Be aware of any limitations or special requirements for earning bonuses. This will prevent you from opening cards that don’t align with your goals or budget. You don’t want to apply for a card that requires you to spend more than you can afford just to qualify for the bonus. This can lead to debt which is costly and harmful to your credit score.

3- Monitor Your Credit Utilization Ratio?

Watch your credit utilization closely. Make sure card balances never exceed 30% of your credit limit. Even when trying to meet spending thresholds for bonuses, it’s vital to avoid unnecessary expenses. Ideally, you want to pay off your balances in full every month to ensure a low utilization ratio.

4- Pay Balances in Full & On Time

Always pay your credit card balances in full by the due date. This avoids interest charges that negate the value of your rewards, which defeats the whole purpose of credit card churning. It also helps maintain a good payment history which makes up the bulk of your credit score.

5- Keep Older Accounts Open

The age of your credit history contributes significantly to your credit score. Instead of hastily closing a card after reaping its bonuses, consider the benefits of keeping your oldest accounts open. Some cards, even with annual fees, may offer long-term benefits that outweigh the cost. If the fees become a concern, investigate whether the card can be downgraded to a free version.

6- Watch Out for Annual Fees

Many reward cards come with annual fees. Ensure that the benefits you receive outweigh these costs. Some churners cancel cards before the second year’s annual fee is charged, but this should be balanced against the potential impact on your credit score.

This article is the shortened version of an article originally published on Hardbacon.ca by Heidi Unrau under the title "Can Credit Card Churning Hurt My Credit Score in Canada?".