When Churning Credit Card Rewards Gets Dangerous

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What are Credit Card Rewards?

When you see banking ads offering cashback and rewards points, it can be hard to resist the temptation to apply for a new card just to get those welcome bonuses. But is it really a smart financial decision to apply for a card just to get extra points? The answer, like many others in the credit card business, is not a simple “yes” or “no”.

The process of churning credit card rewards is to sign up for as many credit cards as possible. People do this for the sole purpose of getting the very first credit card rewards, points and other rewards in their possession. After getting the rewards, the user closes and cancels the credit card account, which is a red flag for credit card issuers.

The idea of ​​applying for a credit card based solely on its bonus is not new. Credit card churners have been doing this for years. Churners are people who frequently open and close reward credit cards to collect miles, points and cash back through welcome offers. After using these bonuses, they promptly cancel their cards to avoid incurring additional charges in annual fees.

In today’s market, it’s a very profitable hobby: Singapore has some of the the most generous credit card offers around the world, and reward credit cards are vying with each other for business from everyday consumers. Churners simply take money that is left on the table. However, this practice of “credit card churning” has its own pitfalls that cannot be taken lightly.

Risk #1: Credit card rewards aren’t worth going into debt, spending more than you can afford, or ruining your credit

Churning requires some time investment and planning. Even opening a single credit card just to get the bonus can lead to financial loss if you’re not careful. Churners are usually well aware of these risks and take great care to avoid them. For example, one must be sure of their ability to meet the requirements of a card to be eligible for its bonuses.

Most cards only offer welcome offers to people who manage to charge a certain amount to their card a few months after opening the account. Citi PremierMiles Visa Card, for example, makes you spend at least S$10,000 in the first 3 months to qualify for its 15,000 bonus miles offer. For many, this can be a huge strain on their monthly budget, especially if they’re juggling multiple credit cards at the same time.

You should also consider annual fees. For instance, Standard Chartered Visa Infinite Card charges users $588.6 per year. Ask yourself, is it worth paying just because you want to earn his 35,000 bonus miles?

Consider the value of what you get from the bonus and whether it justifies paying the fee. Also, you should ask yourself if you can afford the payment. Even cards with an annual fee waiver charge the annual fee immediately on your first month’s bill and refund your fee once you meet the minimum spend requirement. Better to have the funds to pay it back, otherwise you risk having interest charges on your first bill.

Let’s do some math to prove that spending money just to earn bonus miles isn’t a profitable exercise. Tom has a monthly budget of S$2,000 and gets a new Citi PMV card. In order to receive the 15,000 bonus miles, he spent S$10,000 for the first 3 months, which was S$4,000 more than he could afford.

He may be happy to get the 15,000 miles, but what he doesn’t realize is that he now has a credit card debt of S$4,000 which charges him annual interest of 25%. Even if Tom were to reduce his monthly expenses to S$1,500 from the 4th month to pay off his debt of S$500 per month, he will end up paying S$245 in interest, much more than the S$150 he he will have earned in miles. (1 mile = S$0.01 for economy class flights).

This does not even take into account the annual membership fee you had to pay!

Risk #2: Opening a card just for the bonus can put you on the wrong side of the bank

Banks are increasingly cracking down on the practice of churning. Although you can probably get away with it once or twice, it can be difficult to maintain it for a long time.

When broadcasters like DBS released a big credit card bonus promotionthey accept the loss in hopes of gaining a long-term customer who might prove profitable over a long period of time.

That’s why most credit card promotions are only eligible for “new customers” who have not held a card from the issuer in the last 6 to 12 months. If a user closes a card after getting the bonus, it eats into the profitability of these products. To discourage this behavior, some banks in the US have already started freezing the accounts and points of people they believe have earned their bonuses in this way.

In addition to everything we’ve mentioned above, opening and closing a new account can affect your credit score. This could have a potentially negative effect when you need to get bank loans to buy a house or to get quick cash to take care of a personal emergency. For these reasons, frequent use of credit cards may affect your ability to be approved for future credit card and loan applications with these banks.

The essential

While credit card rewards like S$180 cash back or 10,000 bonus miles can be lucrative, blindly pursuing credit card rewards without considering your monthly budget could actually make you worse.

The factors we discussed above should make it clear that there are a lot of things you need to consider before hitting that app button. As churners, you can greatly benefit from credit card bonuses.

However, you shouldn’t do this without a good understanding of the intricacies involved. None of the individual topics are too difficult to understand. You just need to take the time to understand what you can afford and what you can get in return.

The article When Churning Rewards Credit Cards Gets Dangerous originally appeared on ValueChampion.

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