Part 2 of 4: How does Credit Card Churning Impact your Credit Score?
Part 3 of 4: Are you ready for your First Credit Card Churn?
Part 4 of 4: Credit Card Churning: 7 Easy Tips to Maximize your Churn
Bonus: 7 Reasons Why You Shouldn't be Churning Credit Cards
The idea of free flights and hotel nights is very exciting (we love it), but that is often tempered by concern over credit score implications. Time and again the first question we hear involves credit, so we absolutely get it. We had the same concerns so we would like to share some information that made us feel more comfortable about the churning process.
35% - Payment History
Consistently paying your bills on time is good for your score while late payments will significantly lower your score. Your recent history carries more weight in this equation. This is the single most important factor in your score so always pay your bills on time. Better yet always pay your bills in full and on time! It is hard to maximize the value by throwing money away in interest.
30% - How Much You Owe
You may also see this described as debt-to-credit-ratio or utilization. In more simple terms, it is how much you owe relative to your credit limit. The key is to remain in the 1%-20% utilization, for individual cards and on an overall basis. Installment loans, like auto loans and student loans, tend to impact this component far less than other types of credit.
15% - Length of Credit History
The age of your different lines of credit. The longer the average age, the better.
10% - New Credit
Recent credit lines and inquiries. When you hear the term “inquiry” when discussing credit card applications, these are hard inquiries that banks are requesting from one of the major credit bureaus (Experian, Transunion, Equifax) to pull a report of your credit history.
10% - Types of Credit
Auto loans, student loans, mortgages, credit cards, retail store cards, etc.
Now that we have established the criteria we can address the question: What does it all mean and how does "credit card churning" affect all these factors?
In the short term, credit card churning may negatively impact your credit score. For starters, the inquiries may be reducing your score by 5-10 points each inquiry. Also, if you are approved for a new card, it will reduce the average age of all cards. Example, you currently have 1 card that has been open for 10 years, so the average age of cards is 10 years. When you open a new card, it will reduce the average age of the 2 cards to 5 years.
Credit History is 15% and New Credit is 10% so keep in mind that, while important, they are not the most important.
Some or all of the potential reductions above may be negated depending on your credit situation. Example, you currently have 1 card with a balance of $2,000 and a limit of $5,000. At this point you have a 40% utilization (yikes!). Now let’s say the new card has a limit of $5,000 also. Your new overall limit would be $10,000 so your utilization would drop down to 20% (much better!). Utilization is 30% of the criteria so you can see how this can easily wash the negatives or even increase your score.
Individual circumstances vary greatly, but hopefully this post provided enough general information to help you assess your own churning possibilities. Your credit score is very important and we congratulate you wanting to know more about how churning may impact it.
So, did we ease your concerns about the implications on your credit score? If you have any questions, please share in the comment section so we can have some dialogue.
Anneli and I are not professional financial advisors. Please consult with a finance or tax professional before
implementing any of our suggestions in this article.