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The biggest problem with rewards credit cards is that you must spend money in order to earn the rewards. Go back two paragraphs and read again what you have to do to earn 40,000 bonus points on that Chase card. You have to spend $3,000 within three months. You must be very good at controlling your spending when using credit cards to earn sign-up bonuses. Rewards cards generally have higher interest rates than those that don’t offer rewards. If you were to start building up big balances – a 4higher interest rates – you could soon be facing a mountain of debt. In fact, if you have a hard time managing your finances, you’d be much better off getting a credit card with the lowest possible interest rate and leave those rewards cards alone.
Damaging your credit score
Another risk of credit card churning is what happens when you apply for multiple cards. This will go on your credit report and will lower your credit score. Most experts say that every time you apply for credit, it “dings” your credit score by anywhere from two to five points. If you were to apply for 10 cards your score would drop by at least 20 points, which could cause your score to go from “Average” to “Poor.”
Worse yet, is what happens if you were to run up big balances on some of those cards making unnecessary purchases just to earn bonuses and were then unable to make your payments on time or were even forced to miss a payment. In this case, your credit score would drop dramatically – making it difficult for you to get a mortgage or buy a car. You would probably also have to pay more for your utilities, your car insurance and even for your house or apartment if you rent.
On a brighter note
The up side to getting multiple rewards cards is what this would do to your debt-to-available-credit ratio. Go back to our earlier example of $15,000 in credit available and total balances of $7500, yielding a debt-to-available-credit ratio of 50%. If you were able to qualify for new cards with a total of $10,000 in credit available, your debt-to-available-credit ratio would drop to 30%, which would be much better for your credit score.
What you can’t fix
Your credit score is made up of five components. We’ve mentioned two of them – your debt-to-available-credit ratio and credit applications. The third and the one that accounts for 35% of your credit score is payment history or how well you’ve handled credit. This can’t be changed because, well, history is history. So if you want to have and maintain a good credit score it’s important to always pay your bills on time and try your best to not carry any balances forward from month to month.
Should you churn?
Some financial advisors say it’s unfair to take advantage of credit card issuers by signing up for cards just to earn bonuses and those generous rewards. However, others say “all’s fair in love and credit cards” and if you can qualify for those cards why not go for it? After all, the card issuers could always choose to limit or restrict their offers. If they don’t, you shouldn’t feel guilty about taking advantage of them. Plus, you’re giving those banks the opportunity to earn your loyalty. If they treat you well and you continue to use their cards long after you’ve earned the bonuses you’ve gone from a churner into a long-time customer. And that would be a win-win situation for both you and the banks.