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When Rewards Credit Card Churning Becomes Dangerous

When you see banks’ advertisements that boast bonus cash rebate and rewards points, it can be difficult to resist the temptation of applying for a new card just to get those welcome bonuses. But is it really a smart financial move to apply for a card simply to get some extra points? The answer, like many others in the realm of credit cards, isn’t a straightforward “yes” or “no.”

The idea of applying for a credit card based solely on its bonus isn’t new. Credit card churners have been doing it for years. Churners are individuals who frequently open and close reward credit cards to collect miles, points and cash back from welcome offers. After using up these bonuses, they quickly cancel their cards to avoid incurring further costs in annual fees.

In today’s market, this is a highly profitable hobby: Singapore has some of the most generous credit card offers in the world, and reward credit cards are outdoing one another to compete for the business of everyday consumers. Churners are simply taking money that’s sitting on the table. However, this practice of “credit card churning” has its own pitfalls that cannot be taken lightly.

Risk #1: Credit Card Rewards Are Not Worth Going into Debt, Spending More than You Can Afford Or Wrecking Your Credit

Churning requires some time investment and planning. Even opening a single credit card just to get the bonus can lead to a financial loss if you aren’t careful. Churners are typically well versed about these risks and take great care to avoid them.

For example, one needs to be sure of their ability to meet a card’s requirements to be eligible for its bonuses. Most cards only give welcome offers to people who manage to charge a certain amount to their card within a few months of account opening.

Citi PremierMiles Visa Card, for example, has you spending at least S$10,000 within the first 3 months in order to qualify for its 15,000 bonus mile offer. For many, this can be an immense strain on their monthly budget, especially if they are juggling multiple credit cards at the same time.

You also need to account for annual fees. For instance, Standard Chartered Visa Infinite Card charges users S$588.6 per year. Ask yourself, is this something worth paying just because you want to earn its 35,000 bonus miles? Consider the value of what you’re getting out of the bonus, and whether it justifies paying the fee.

Also, you should ask yourself whether 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 after you meet the minimum spending requirement. You better have the necessary funds to pay it off, otherwise, you may incur interest charges on your first bill.

Let’s do some math to prove that spending out of your means just to earn bonus mile awards is not 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 spends S$10,000 for the first 3 months, S$4,000 more than what he could afford. He may be happy about getting the 15,000 miles, but what he doesn’t realise is that he now has a credit card debt of S$4,000 that charges him an annual interest of 25%.

Even if Tom was to decrease his monthly spending to S$1,500 from the 4th month to pay his debt back S$500 a month, he will end up paying S$245 in interest, which is significantly more than S$150 that he will have earned in miles (1 mile = S$0.01 for economy flights). This doesn’t even take into account the annual fee you had to pay!

monthly interest expense a person needs to pay in order to fully repay a credit card loan of S$4,000 with 25% APR when repaying S$500 per month

Risk #2: Opening A Card Just For The Bonus Can Get You On The Bank’s Bad Side

Banks are increasingly cracking down on the practice of churning. While you can probably get away with it once or twice, sustaining it over a long period of time can be difficult. When issuers like DBS put out big bonus promotions for credit cards, they are accepting the loss in hopes of winning over a long-term customer who may prove profitable over a long period of time.

This is why most credit card promotions are eligible only for “new customers” who have not held a card from the issuer in the last 6 months. If a user closes a card after getting the bonus, they are eating away into the profitability of these products. To discourage this behaviour, some banks in the US have already begun to freeze accounts and points of people who they suspect earned their bonuses in this way.

On top of everything we mentioned above, opening and closing a new account can have consequences on your credit score. This could have a potentially negative effect when you need to get bank loans to buy a home or to get some quick cash to take care of a personal emergency. Because of these reasons, frequently churning through credit cards may affect your ability to be approved for future credit card and loan applications from these banks.

The Bottom Line

While credit card rewards like S$180 of the cash rebate or 10,000 bonus miles can be lucrative, blindly pursuing credit card rewards without regard to your monthly budget could actually leave you worse off.

The factors we discussed above should make it clear that there is a lot you need to consider before hitting that application button. Like churners, you can benefit greatly from grabbing credit card bonuses.

However, you shouldn’t do it without a proper understanding of the intricacies involved. None of the individual topics is too difficult to understand. You just have to put in the time to understand what you can afford and what you are able to get in return.

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