Can Credit Card Churning Hurt My Credit Score in Canada?

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    Credit card churning, the act of repeatedly applying for credit cards to benefit from sign-up bonuses, has emerged as a common strategy among Canadian consumers seeking to maximize their rewards. However, with every new credit card application comes a potential impact on one’s credit score. In this article, we will explore the impact of credit card churning on your credit score, as well as explain to you how you can benefit from multiple credit cards without hurting your credit score. 

    What is Credit Card Churning?

    Credit card churning is a practice where individuals sign up for new credit cards to take advantage of their lucrative signup bonuses and then cancel them before they have to start paying annual fees.

    When it comes to credit card churning, timing is everything. Savvy churners carefully analyze the market to identify credit cards with the most enticing signup bonuses. These bonuses can range from a hefty amount of miles, points or cash back. 

    Once they find a card that piques their interest, churners apply for it and eagerly await approval. Upon receiving the new credit card, they strategically spend the required amount within the designated time frame to unlock the promised welcome bonus. This often involves meticulous planning and budgeting to ensure they meet the spending threshold without overspending.

    After successfully reaping the benefits, churners proceed to cancel the card before the annual fee kicks in, avoiding any charges that could diminish the value of their rewards. This requires organizational skills and attention to detail, as churners must keep track of the cancellation dates and follow the necessary procedures to close the accounts.

    How Credit Card Churning May Impact Your Credit Score

    Every time you apply for a new credit card, your credit score takes a small, temporary hit. This is mainly because credit card providers pull your credit report to evaluate your risk—this is known as a hard credit check. The impact of a hard credit check on your credit score is generally minimal and fades over time.

    However, credit card churning, which involves repeatedly opening and closing credit card accounts to take advantage of sign-up bonuses and rewards, can have more significant consequences. Here are the main factors used to determine your credit score that credit card churning can cause.

    Hard Credit Checks

    Every time you apply for a credit card, the issuer conducts what’s called a hard credit check or hard pull on your credit report. In Canada, hard inquiries can cause a temporary drop in your credit score by a few points, regardless of whether the application is approved or declined. This means that even a declined credit card application following a hard check can negatively impact your score. As a result, it’s essential for individuals engaged in credit card churning to use free apps to monitor their credit score closely. Additionally, they should thoroughly read the credit score and revenue requirements for each card they’re considering. By doing so, they can better target applications towards cards they’re more likely to be accepted for, reducing the risk of unnecessary hard inquiries. 

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    While hard credit checks will recover over time, frequent checks as a result of credit card churning can impact your score more significantly over time. The presence of multiple inquiries can signal to lenders that you’re seeking a lot of credit in a short time, portraying you as a higher risk borrower. Thankfully, these hard inquiries will not impact your credit score for more than 12 months; however, they can stay on your Equifax report for up to three years and on your Transunion report for up to six years.

    Credit Utilization Ratio

    Your credit utilization ratio is a measure of how much of your available credit you’re actively using, and it plays a pivotal role in the determination of your credit score. When you open a new credit card, you often benefit from an expanded credit limit, which can temporarily lower your credit utilization ratio. 

    However, many credit card bonuses come with the stipulation that a certain amount must be spent within a designated period to earn the reward. As a result, credit card churners may artificially inflate their spending, such as by purchasing non-perishable items or buying gift cards in bulk. While these tactics can help achieve the bonus, they also drive up card balances, potentially increasing the credit utilization ratio, especially if not paid off promptly. Closing a card after reaping its rewards, especially with balances on other cards, can further amplify this effect. An elevated credit utilization rate can be perceived as a sign of financial strain or over-reliance on credit, making lenders apprehensive and potentially leading to a dip in one’s credit score.

    Age of your credit accounts

    The length of your credit history plays a role in your overall credit score. Older accounts have a positive impact because they showcase a longer history of managing credit. Credit card churning can adversely affect this aspect of your score. Regularly opening and then closing accounts can reduce the average age of your credit accounts. Lenders tend to favor borrowers with longer, more stable credit histories as they’re viewed as less risky.

    Payments Timeliness

    While credit card churning inherently doesn’t affect your payment history, the act brings along the challenge of managing multiple accounts. With numerous cards to keep track of, it can become easy to miss a payment deadline. Even a single missed payment can negatively affect your credit score. Thus, while the strategy of churning can offer significant rewards, it demands meticulous organization to ensure that all bills are paid promptly. Missing payments, especially repeatedly, can lead to a significant drop in credit score and remain on your credit report for up to seven years in Canada.

    How to churn credit cards without hurting your credit score

    Credit card churning offers a tempting array of rewards and bonuses. However, without a well-thought-out strategy, this practice might put a dent in your credit score. Here’s some tips to help you maximize benefits while protecting your financial reputation.

    Be Selective with Your Credit Card Applications 

    Before diving into the world of credit card churning, research each card’s requirements and benefits. Ensure you meet the credit score and income criteria to avoid declined applications, which can negatively impact your score. Moreover, rather than applying for several cards simultaneously, consider spacing out your applications. This approach minimizes hard inquiries in a short period and offers you time to manage each card’s spending requirements effectively.

    Monitor Your Credit Utilization Ratio 

    One key to maintaining a healthy credit score is to watch your credit utilization closely. Even when aiming to meet spending thresholds for bonuses, it’s vital to avoid unnecessary expenses. Pay off your balances in full every month to keep your credit utilization low, thus maintaining a positive score and avoiding interest charges.

    Keep Your Older Accounts Active 

    The age of your credit history contributes significantly to your credit score. Instead of hastily closing a card after reaping its bonuses, consider the benefits of keeping your oldest accounts open. Some cards, even with annual fees, may offer long-term benefits that outweigh the cost. If the fees become a concern, investigate whether the card can be downgraded to a free version.

    Monitor your credit score & credit report

    Using free credit score monitoring tools can keep you updated about your credit health, allowing timely interventions if necessary. Also, regular reviews of your credit report will identify any inaccuracies and give you a comprehensive picture of where you stand. Remember, in Canada, you’re entitled to a free credit report from each major credit bureau annually.

    Diversify Your Credit Portfolio 

    While credit cards significantly influence your score, diversifying your credit types can offer protection against potential churning impacts. This includes maintaining a mix of installment loans, retail accounts, and mortgages.

    Consider Applying for U.S. Credit Cards 

    If you frequently travel or do business in the U.S., consider applying for a U.S. credit card offering a generous sign-up bonus. These applications and their associated credit activities generally don’t impact your Canadian credit score. It’s another avenue to explore rewards without affecting your primary credit profile.

    Credit Card Churning & Your Credit Score: The Bottom Line

    Credit card churning presents an intriguing prospect for Canadians eager to capitalize on sign-up bonuses and reap the maximum rewards from their credit cards. While the allure of significant benefits is undeniable, it’s paramount to approach this strategy with caution and awareness. The effects of credit card churning on one’s credit score can range from negligible to substantial, depending on individual practices and financial management. By adopting informed strategies, regularly utilizing free credit score monitoring tools, and diversifying credit activities, Canadians can indeed enjoy the best of both worlds – reaping the rewards without compromising their financial health.

    Arthur Dubois is a personal finance writer at Hardbacon. Since relocating to Canada, he has successfully built his credit score from scratch and begun investing in the stock market. In addition to his work at Hardbacon, Arthur has contributed to Metro newspaper and several other publications