What is Churning?

Have you ever wanted to take a shower on your flight? Ever wanted to lay down on a bed on a flight? How about eat 5-star food on a flight? Drink at a bar on a flight? First class tickets usually cost $10,000+, but did you know you can book first class tickets with points? Well, now you know that you can. And you can amass a lot of travel points via churning.

What is churning? Good question. Not many people know; I didn’t know until this year and since I’ve found out it has become my hobby.

Churning, more specifically, credit card churning, put simply, is the act of applying for credit cards, receiving the welcome bonus/points, cancelling the card, and doing it all over again to amass many credit card points very quickly.

Using myself as an example, just this year I have amassed over 500,000 travel points. That is enough for a mini around the world trip in first-class for 2 people! What would cost me mere hundreds in taxes would cost you tens of thousands if paying in dollars.

Before I share how you can do the same, let me answer some questions I know you have:

 

“Is that legal?”

Yes. There is nothing illegal about churning.

 

“Can you even get the welcome bonus more than once?”

If you read the terms and conditions of most credit cards there are some clauses that discourage people from trying to get the welcome bonus repeated times. Here is an example of the T&C from the American Express Gold Personal card:

This offer is only available to new American Express® Gold Rewards Cardmembers. For current or former American Express® Gold Rewards Cardmembers, we may approve your application, but you will not be eligible for the welcome bonus. Offer subject to change.

Well that sucks. Why bother churning if the T&C say this then? The reason is that it is not always enforced. Personally, I have received the welcome bonus twice on that exact card. If you look at this from the bank’s perspective, it’s a scare tactic. By posting this, they hope it will deter you from trying to get the welcome bonus more than once. For the banks to actually implement these terms takes a real effort on their part to filter out repeat applicants so they bank on (pardon the pun) you being scared off enough by their T&C.

 

“Won’t that hurt my credit?”

Yes. No. Maybe.

Let’s break down what a credit score is and how it is calculated first.

Canada has two credit bureaus: Equifax and Transunion. Each time you apply to open a credit account in whatever form it may be (loan, mortgage, credit card, etc) the potential issuer checks with one or both of the credit bureaus to look at your credit information and payment history, to assess your credit reliability. This is known as a credit inquiry.

Your credit report consists of all of your credit account details including opening date, credit limit, payment history and all credit inquiries.

Equifax and Transunion use their own formulas to take all of your credit information and turn it into a number. This is your credit score. It is always a number between 300-900. As mentioned, they use their own formulas so your Equifax and Transunion credit scores will often differ.

In Canada you can check your score for free, without hurting your score, a couple of different ways.

My personal favourite is CreditKarma for several reasons: It tracks your score for you, it updates weekly, it shows you the balance on your credit cards, your payment history and all inquiries. It also alerts you every time there is a new inquiry into your account to protect yourself from fraud. It is the most detailed way to get your credit score in Canada and it’s free. CreditKarma only checks your TransUnion score, though. To look at our Equifax score we have to go elsewhere.

Mogo is where I go to check my Equifax credit score and it updates your score monthly. It is not as comprehensive as CreditKarma, but it does the job of giving you your score and alerting you of any new inquiries on your account to protect you from fraud. And it is also free. Others that people use are Borrowell which updates your score quarterly and RateHub which updates your score quarterly. Both are free. If you bank with CIBC or RBC they also have programs to track your Equifax score for free.

Before I started churning my concept of credit scores was, applying for lots of credit cards is bad and paying off your balance on time and in full is good. I wasn’t wrong but that definitely wasn’t the whole picture. Here is how your credit score is calculated:

 

  • Payment history – 35% of your score
  • Amounts owed/credit utilization – 30% of your score
  • Average age of accounts – 15% of your score
  • New credit inquiries – 10% of your score
  • Credit types – 10% of your score

 

Payment history is pretty self explanatory. You should always being paying your balance off each month and in full making this part of your score perfect.

Credit utilization refers to what percentage of your available credit you are using. Most issuers want to see your utilization between 5-10%. For example, if you have a card with a $10,000 credit limit, you should try to always keep your balance under $1,000. This means you may be paying down your balance multiple times per month.

Average age of accounts is also pretty self explanatory. The higher your average age of accounts the better. This is why you should NEVER cancel the credit card you’ve had the longest amount of time.

New credit inquiries we talked about earlier, but generally a lot of credit inquiries will lower your score.

Credit types means that the issuer wants to see that you are diversified in the types of credit accounts you have. These can be things like credit cards, phone plans, mortgages, lines of credit, etc. The more responsible you are with different types of credit works in your favour.

As you can see, credit inquiries only account for 10% of your credit score and only for a short period of time. Generally your score recovers from each credit hit after about 3 months.

The funny thing is, many people’s scores actually increase with churning because their utilization goes down and they manage their credit more responsibly with their payments.

In the end, the number doesn’t matter. That’s because issuers look at your overall credit report, not your score. They assess your credit reliability based on their own calculations of your credit report. Each issuer weighs things differently and cares about something more than others. Many issuers could care less what your actual score is. Your score should just be used as a guideline of your overall credit health.

Here are some tips to maintain a healthy credit score:

Pay the balance in full and on time. You should be doing this anyways but if you aren’t, start now.

Keep your utilization between 5-10%. As mentioned earlier, this is the ideal. If you had to ask me what the max is before it starts to look bad I would say 30% should be your limit.

Keep your longest held card. That card you got when you turned 19 and you never use anymore, keep it because it lengthens your average age of account and works in you favour. You don’t have to use it, but at least keep it.

Know which credit bureau the issuer is checking. Here is a list of which credit bureau is check by which issuers:

Transunion – AMEX, CAA MC, Canadian Tire, MBNA (sometimes both), Rogers Bank, RBC, Scotiabank, Tangerine, VanCity, Walmart MC

Equifax – AMEX (on occasion), CIBC, Chase Citi, Desjardins, HSBC, MBNA (TU first but sometimes both), National Bank, PC, TD

Both – Capital One

 

“Is churning for me?”

Churning definitely isn’t for everyone.

I can think of two types of people I would tell not to churn, people looking to apply for a mortgage within the next 6-12 months and people who are disorganized.

Because your credit score may go down with all of the recent credit inquiries, if you are looking to apply for a mortgage in the next 6-12 months this may not be for you, but as mentioned before if done right your score could actually go up. The credit inquiries will still be there and remember issuers look at your whole credit report, not your score. You have to make the call yourself if you are in this position. If you’re married, maybe only one spouse churns and the other maintains a healthy score for a while.

If you’re a generally disorganized person, churning isn’t for you. Churning requires great organization to remember what card is due on what day, what card is at what utilization percentage, etc. It can be done with a little bit of time and effort and I would definitely say it is worth it but if you can’t maintain organization then it’s not worth the potential headache and hits to your credit report.

If you aren’t one of those two people, let’s get started with how this all actually works. Each Saturday I’ll be posting about how to churn and what you need to do to travel on points. I’ll also be sharing some secrets you won’t find online and help you learn from my mistakes. For example, with one simple change, I could have an extra 100,000 points. D’oh.

Have you ever dreamt of flying first class but don’t want to pay $10,000+ for a ticket? Me too. Churning is our ticket into those seats. Subscribe on the sidebar so you never miss a post. Or follow us on Facebook and Instagram to get post updates.

Never stop adventuring!

 

2 thoughts on “What is Churning?

  1. Pingback: Churning Basics

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