Churning Credit Cards
By Bruce Shawkey
Interesting story in the New York Times about people who "churn" credit cards. The idea is to earn maximum rewards and perks. I did something like this myself back in the day. I even kicked it up a notch as a credit card merchant for my online business, brucesvintagewatches.com.
I would take a cash advance on one credit card to buy a batch of watches for my business, masquerading it as if it were a purchase by one of my customers. If I timed it right, I had 60 days to repay the balance, all for a minor merchant charge of around 3 percent.
OK, here is the article:
They Each Own 50 Credit Cards. Should You?
A number of Americans are making thousands by exploiting credit card reward offers.
Every few months, Mr. Palm, a 57-year-old freelance television producer who lives in Illinois, goes online and applies for a new credit card.
He opens only cards that come with a sign-up bonus: a reward of a few hundred dollars in points for new customers who reach a modest spending target.
“The highest point of anxiety is when you click the submit button for your latest card application,” he said. “And then, as soon as it’s approved, there’s that adrenaline hit.”
Each sign-up bonus is small, so to make a decent income, Mr. Palm keeps applying. During the seven years he has been into this side hustle, he estimates, he and his wife have opened more than 50 cards.
The promotional bonuses have netted his family more than $40,000, he said.
Mr. Palm is a member of what is known as the churning community — people who regularly open credit cards to harvest lucrative promotional rewards. The churning logic is simple: Hundreds of credit cards come with sign-up bonuses. So why not apply for as many cards as possible?
Mr. Palm doesn’t consider himself an extreme churner. While he has opened more than 50 cards over seven years, he knows of others who open 20 cards annually. Some people have been at it for decades.
Isaac Khor, a doctoral student at Northeastern University, has been opening credit cards since the start of the pandemic. “I’m up 15 grand this year,” he said. “Ph.D. stipends are not that high, so this actually does dramatically augment my income.”
Churners come from all walks of life. Some are young adults, others are stay-at-home parents, and still others are wealthy professionals. But most have a few traits in common.
“It’s a hobby for people that enjoy reading the fine print,” Mr. Khor said. A typical churner loves squeezing the last dollar out of every deal, even if that requires several hours of spreadsheet management each week.
Lindsay Ash started churning 15 years ago, opening credit cards for herself and her husband. The couple, who live in California, have roughly 60 active cards.
“The amount you can eke out of it is ridiculous,” she said. “I still have ‘pinch myself’ moments all the time.” In addition to the cash — five figures each year, she said — her churning supports annual vacations to Japan, Florida and Hawaii.
One Wrong Step Can Wreck Your Credit
Churning isn’t for everyone. The hobby requires cash upfront, since unlocking a sign-up bonus usually requires customers to reach a spending threshold. One wrong step can wreck your credit score and lead to a hefty interest charge.
“If you are at all remotely uncertain about your finances and juggling bills, stay away,” Mr. Palm said.
But churners often have surprisingly high credit scores. While opening a new credit line can lower a customer’s score, having low credit utilization — spending only a small fraction of one’s available credit — can raise it. Because churners often have access to vast amounts of credit through their card collections, many enjoy superprime scores.
Card issuers know that thousands of people are profiting from their promotional offers. But it’s a hard issue to solve.
“The problem is one of adverse selection,” said Roger Hochschild, former chief executive of Discover Financial Services, a popular card issuer that Capital One later acquired.
Credit card companies make most of their money in two ways. When customers don’t pay off their balances, issuers often charge extremely high interest rates. And every time customers swipe their cards to make purchases, issuers earn a small fee. As a result, credit card companies want to persuade as many customers as possible to swipe with their cards.
“To get them to get a new credit card, you’ve got to catch their attention,” Mr. Hochschild said. Hence the decades-long cycle of promotional offers, with issuers introducing new cash-back categories and one-time bonuses every year.
Internally, financial analysts at credit card companies often project that most customers will sign up for a card and then use it for most of their purchases, Mr. Hochschild said. That way, issuers will lose money on the promotional offers but make up for it in swipe fees and interest payments over time.
But that assumption can backfire, especially when offers are too attractive. Then a rush of people seeking to game the system can flood in. “Every person who just does the letter of the promotion and no more, you lose money on,” Mr. Hochschild said.
Issuers take steps to avoid this. Chase recently cracked down on customers who try to sign up for the same credit card several times. American Express has done the same. But issuers can’t discriminate with publicly advertised offers, or else “you will run into issues with regulators,” Mr. Hochschild said.
Taking Advantage of Loopholes
It’s hard to know the exact size of the churning community. A Reddit page on the practice has tens of thousands of weekly visitors, and popular websites and podcasts on the topic rack up thousands of monthly views.
Far more people participate casually, taking advantage of the occasional juicy promo offer. A 2023 study published by the Federal Reserve Board estimates that sophisticated credit card users receive $15 billion annually at the expense of people who carry balances and don’t take advantage of rewards.
Max Gunara, a 30-year-old business owner, estimates that credit card companies and airlines lose $30,000 to $50,000 a year on his perks and bonuses. While he pays $15,000 in annual fees on his personal and corporate cards, he earns roughly 3.3 points per dollar of spending. Because he owns several businesses, his expenses are in the low seven figures.
“I have 41 credit cards and I want to say 19 million points that I’m sitting on at the moment,” Mr. Gunara said. He observed that for every person trying to optimize rewards, there were “10 to a hundred” others who didn’t take advantage of the benefits on their high-fee cards.
“It is a massive wealth transfer to me,” he said.
Some cards also offer a zero percent interest rate for the first 12 months as a sign-up bonus. Mr. Gunara used one such card to borrow $76,000 interest free, before paying off the balance soon before it was due.
“In today’s interest rate environment, that is the cheapest form of business credit you can get,” he said.
Some people go even further. Cardholders earn cash back when they rack up huge balances, so they are often on the lookout for manufactured spending, or loopholes that allow users to build expenses without actually spending money.
“Back in the day, it was possible to order dollar coins from the Mint and pay for them” with a card to earn a sign-up bonus, Ms. Ash, the churner from California, said. Other techniques include buying gift cards, overpaying taxes and purchasing gold bars at Costco to earn cash back and reach promotional thresholds.
Some people also participate in what are known as buying groups. Stores often tell customers that they can buy only a limited number of in-demand products, like newly released iPhones or electronics on sale. But some companies want to buy products in bulk. To circumvent the limits, the firms will work with a buying group, in which hundreds or thousands of individuals will each purchase the product separately and then resell it to the bulk buyer. That way, the buyer gets all the product it wants, and the group members harvest credit card rewards.
Churners say such tricks are growing harder to find. Whenever a moneymaking technique becomes too popular, businesses close the loophole, or go bankrupt. As a result, many people keep their techniques secret so they can remain profitable for longer.
“For every loophole that closes, another one opens,” Mr. Gunara said.
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