Why Credit Card Churning Doesn't Lower Your Credit Score

The most common question I get asked when it comes to credit card churning to rack up hundreds of thousands of points every year is, "doesn't it hurt your credit score"?  The answer to that is both yes and no. 

In the short term, it can take 5-6 points off your credit score when making an application for credit. So far this year I have applied for and received 8 new credit cards. My credit score has actually improved by 1 point.  (Figure 1).

To understand how this happens, you need to know how a credit score is made up. There are approximately eight main factors that go into your score.

1) Probably the most important is your percentage of on time payments.  Paying bills on time is the best way to show the banks you will be paying them back.  Importance: High

2) Utilization Ratio.  The utilization ratio is the primary reason that credit card churning can actually improve your credit score! Here's why.  Let's say that you spend $10,000/month on your credit cards.  Let's say that you have 3 cards and your total credit limit of the 3 cards is $60,000.  You are using 1/6 of your available credit or a credit utilization of 17%. The banks consider that kind of high.  If you now apply for 4 more credit cards and have $120,000 of combined credit, your utilization ratio just got cut in half. That looks better to the banks, therefore your score goes up! Importance: High.

3) Account aging.  The longer that you have accounts open, the better that looks to the banks.  The banks like to see an average account age of at least 6 years.  I have my two Citi AA cards from the mid 1990's still open.  I don't use them much any more, but I would never think to close them.  At some point, I may switch them over to a no fee version of the card.  That still keeps the credit history on the account intact.  Account age can work both for and against you.  The greater number of new accounts you have, the lower your average account age becomes.  When you cancel those new accounts, the average age increases again.  Bottom line: Keep your oldest accounts open and in good standing.  Switch them over to a no fee version if you aren't using them any more. 
Importance: Medium.

4) Total number of accounts.  Believe it or not, more can be better.  Banks figure if other banks are lending you money, you must be a good risk.  I have 30 total credit accounts, 19 of which are currently open.  Not all of them are credit cards.  That number includes mortgages and car loans as well. This is why I suggest that before you get started with a focused credit card strategy, that you get a free credit score from MyFico.com.  Importance: Low

5) Inquiries for credit show up on your report after you apply for credit. If you are applying for multiple loans, it may be a sign that you are in financial trouble. This is where your score can get lowered from credit card applications. This is the primary reason that professional credit card churners apply for 3-5 cards in one day. All the lenders are seeing your score on the same day before the credit inquiries hit your report.  Importance: Low.

6) Lastly, banks want to know if there are any derogatory remarks in your score.  It kind of reminds me of that Seinfeld episode where Elaine wants to get a look at her medical chart.  All her doctors in the episode have a copy of her derogatory remarks. Derogatory remarks include things like bankruptcies, judgements and liens. Importance: High.

7) Total Debt plays a role in your score as well.  this is the sum of all your outstanding loans.  Obviously less is better here.

8) Debt to income ratio.  This number is calculated as the total household monthly debt divided by the total household monthly income.

In the long run, credit card churning will have little to no effect on your credit score as long as you pay on time and in full every month.

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About THE POINTS DOCTOR

THE POINTS DOCTOR is Bruce J. Wilderman DDS of Artistic Expressions Dentistry. Dr. Wilderman has a practice limited to Cosmetic Dentistry, serving patients of the Philadelphia Area since 1986. He and wife of 40 years have enjoyed traveling the world in first class since 2012 for little or no money with the points and miles they have earned from the credit card companies. Dr. Wilderman with his 10+ years of experience in the field of miles and points would love to teach you how to do the same. You may reach him at ThePointsDoctor@gmail.com.