How Canceling Credit Cards Backfires — Terribly

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Credit card churning can turn a clever idea into a bad one.

Key Point

• Canceling credit cards is legal, but credit card companies consider it an abuse of the system.
• Without planning and discipline, it can be a headache and hurt your credit score.

Having a credit card can save you a lot of money. For example, you can earn airline points or cash back. Your card may come with a concierge to help you plan your trip or buy tickets to see your favorite band perform. And the attractive nature of many credit cards leads to them being canceled. Here’s what credit card churning is, how it started, and how badly it can backfire.

What is credit card churning?

Credit card churning is the repeated opening and closing of a credit card to earn the reward the card offers at that time. If you have a good credit score, it’s dangerously easy to open as many cards as you want.

The beginning of credit card churning

People took advantage of the situation when credit card companies started offering bonuses to those who opened the card. , stop using it. As the rewards piled up, they told others about the practice and it became popular.Soon, credit churning his card was seen as a clever way to get something for free. I was.

Credit card companies pay attention to trends

To be clear, credit card churning is not illegal. However, credit card companies see this as manipulating their system and often put roadblocks to slow (or stop) this practice.

Just last week, I came across an article revealing “the best credit cards to cancel.” “Credit card company about It is to introduce churning protection. ”

Until then, if you choose to employ credit card churning strategies, do so at your own risk.

Here are some ways credit card churn can cost more than it’s worth.

credit card companies are smart

Card issuers know a lot about cancellations. Churner detection is also becoming more sophisticated. PLEASE NOTE: Your credit card issuer has the legal right to close your account without warning.

Suppose you go on vacation and your credit card is declined when you check out of a hotel. I had no idea it was canceled by my credit card company. Unless you have another way to pay for your room, you could end up in hot water.

But a canceled credit card brings with it more problems than inconvenience and embarrassment.

“Use” is worth 30% of the FICO® score. Here’s how it works:

• In this scenario, you have 3 open credit cards, each with a spending limit of $5,000. This gives you $15,000 in available credit.
• Since you owe a total of $5,000 on 3 cards, you are using 33% of your available credit ($5,000 ÷ $15,000 = 0.33).
• Credit card companies recognize patterns of cancellation and cancel cards. Currently, only $10,000 total credits are available. Suddenly you owe $5,000, which means you’re using 50% of your available credit.
• Your overall credit score will drop as more credits become available.

It’s not a “finder keeper” problem

It’s worth reading the fine print before getting a new card. The contract may give the company the right to recoup compensation, especially if they believe you were trying to manipulate the system.

Oversubmissions also affect FICO® scores

“New credit” accounts for 10% of the score. Applying for more cards will reduce this portion of your FICO® score.

Annual fees are no joke

The best credit card rewards tend to be associated with cards with annual fees.

you risk debt

None of us know it’s around the corner. It may be sick or unemployed. It could become another global pandemic. Even if you don’t carry the balance and pull out your card, you may find yourself in the finance department and have to buy your daily necessities on credit.

Another way you risk going too deep is mass-producing cards that require you to spend a significant amount of money before the rewards accrue. months after opening the account. Unless you train yourself to pay it back in full, you will find yourself in debt.

Unless the rewards you receive are worth more than the interest you pay, there is no reason to remove the rewards card.

There is nothing inherently wrong with rewards credit cards. The problem arises when you have more debt than you can handle and forget to factor in the impact of a new card on your credit score.