Just the mention of a credit card is enough to send many Australians fleeing – but could you be missing out on some of the huge benefits?
What is credit card 'churning'?
Credit card churning is a strategy in which people sign up for multiple credit cards, simultaneously or in succession, to earn the sign-up bonuses that are typically offered by credit card providers. There is a multitude of providers looking to tempt you into choosing them, and apart from offering better payment terms or spending limits, one of the most obvious ways is to make that sign-up bonus that much juicier.
One of the most common bonuses on offer here in Australia is to earn points as part of a partner rewards program, such as the Qantas Frequent Flyer Points or Virgin Australia Velocity Points. Some cards can offer some seriously good deals, and I've seen offers for up to 150,000-200,000 Frequent Flyer points when you meet the minimum spend on the card.
I've been credit card churning for the best part of a year now and haven't looked back since my first. While churning sounds scary and can have its drawbacks (which we'll get to later) it is also a powerful and easy way to level up your personal finance game almost instantly.
What's the catch?
Unfortunately, it's not all sunshine and roses in the credit card space. While forward credit can be extremely useful and I think should form part of a sophisticated personal finance setup, there are things to consider such as your credit score, your capacity and willingness to take on a line of credit and the minimum spend on each card.
In Australia, our credit score system is structured slightly different to the United States where it is essentially the be all and end all of finance (or so it seems). I've found that by paying my balance on time (I use my credit card just like a debit card, transferring the money instantly) and not drawing down more than 25% of my credit limit, my credit score has remained intact.
However, the risk with credit card churning is that the banks may catch onto you and stop providing you with credit cards. Credit cards are essentially a gateway for the banks, as it provides them an opportunity to lure you into their ecosystem and cross-sell you on big-ticket items such as savings accounts, and the holy grail, a juicy home loan.
The trick here is to churn your cards semi-regularly, but if you have the income, capacity, and self-restraint to do so, keep the card dormant for a little bit of extra time so it's not an instant rinse and repeat cycle on the cards (which will see you cut-off quite quickly from further cards!).
The biggest catch of all is the minimum spend on these cards. Most cards will require you to spend a minimum of $1,500 / $2,000 / $5,000 in the first 3 or 6 months to receive the bonus rewards from the card. The key to "winning" out of a churning strategy is to only use the cards when you have the expenses that already need paying. For instance, if you have a big car payment coming up or you have regular expenses that will meet the spend without trying, then it is absolutely a win. But where people fall down is they start spending to reach the minimum, at which point they may actually lose money on churning because if they had just not spent the money it would be worth more than the bonus which they will receive.
The verdict
I'm a big advocate of credit card churning and have been able to score a lot of bonuses such as free international flights and other rewards through the use of the cards on those big-ticket expenses I have had. It's up to you to investigate each card thoroughly before jumping in and making sure you have a setup to restrict your spending to those items that are necessary and within your spending limits.
