By Adam Jusko, ProudMoney.com, adam@proudmoney.com

Do you like to game the system? Do you like to look for the loopholes and arbitrage opportunities that others miss? It can be very intoxicating. But sometimes gaming the system can be dangerous as well. Which brings us to credit card churning.

What is credit card churning & why would you do it?

Credit card churning is the practice of getting approved for a credit card, taking the upfront bonuses that the card offers, and then closing the account as soon as possible. If the card has an annual fee, it might mean getting any bonuses available before the annual fee has to be paid. The “churning” aspect is that you do this repeatedly, opening a large number of card accounts and then quickly closing them. Sometimes people even apply for and receive the exact same credit card multiple times.

It is easy to see the attraction is doing this. You essentially get something for nothing. Sometimes you don’t have to do anything to get nice reward bonuses, sometimes you only have to use the card for a nominal amount of charges, say $500, to get the bonus. You could be getting cash, you could be getting points, you could be getting airline miles. Once you have the bonus, close the card and move on to the next one. You can get a lot of free money and other perks this way.

Why do banks allow card churning?

Banks want new credit card customers. Their strategy is to get as many people signed up as possible, with the thought that a majority of them will become regular customers who will eventually make money for the bank. The upfront rewards they give are like a “loss leader” — they give you a freebie today, assuming that over the long haul you will become a profitable customer.

In addition, since many credit card decisions are made by computers, there is often no human checking to see if potential customers have a history of opening and closing accounts. If your credit score is good enough to qualify, you get the card.

That said, many credit card companies have caught on to the churning game and put safeguards in place. You may find that you can not apply for the same card more than once over a certain multi-year period, or that you can’t apply for more than 2 or 3 credit cards from the same bank over a certain period. There are also other ways to “red flag” you so that your new application does come to the attention of a real person instead of simply getting the OK based on your credit score.

What are the dangers of credit card churning?

First off, let’s make one thing clear: credit card churning is NOT illegal. You can apply for as many credit cards as you want, and if banks approve you and give you the rewards, you are under no obligation to give back the rewards, and no bank is going to sue you if you have applied and been approved based on your valid personal information. (If you have lied on your applications to get more cards, that could be a different story.)

However, when you continuously open and close credit cards, this activity shows up on your credit report and it factors in to your credit score. This could hurt you in the future, in the following ways:

  • Your credit score takes a hit every time you apply for a credit card, so you are lowering your score each time you go after a new card. Your score does bounce back, but opening too many new credit accounts in too short a time hurts your score.
  • If you need to be approved for a car loan or mortgage loan or some other type of financing while you’ve been credit card churning, you might have hurt your credit score enough that you will not get approved or you will be approved at a higher interest rate than would have been the case if you hadn’t churned.
  • At some point, you are going to anger the banks that have been approving you for new credit. Once you have been discovered, your current accounts may be closed by the bank and you may be tagged for disapproval from that point forward. Applying for all those credit cards could lead you to have no credit card in the end.

Is credit card churning still worth it?

Credit card churning is not as lucrative as it once was, and the big banks have caught on. However, if you have a good credit history, you still can be approved for multiple credit cards and earn some excellent bonuses and rewards from them. If your credit history is not very good, or you are expecting to apply for an important loan such as a mortgage in the near future, then you definitely want to stay away from excessive churning.