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What is ‘Credit Card Churning?’
Many credit card companies offer special offers including points and interest free periods. Customers will take advantage of these special offers and then stop using them after the special offers and benefits have been used.
Credit Card Flipping
Also known as ‘Credit Card Flipping,’ although not illegal it is frowned upon by the credit card companies and can damage your credit score. An example would be a customer who takes out a credit card with an offer of 0% for the first twelve months. This means the card will not charge any interest on the card purchases as long they make the minimum repayment fees each month, normally around 5%, and they don’t go over their agreed limit.
Towards the end of the twelve-month special offer period, they then take out another 0% credit card with a different provider and then start front loading all the debt onto the new card allowing them to release capital in their bank account to repay the first credit card before the special offer expires.
If you go over your credit limit what happens?
Most credit card providers will immediately revoke the special introductory offer. Exceeding the limit would would break the terms of the agreement and void the introductory offer. In this example, the 0% interested rate would be changed with immediate effect to the standard rate for that particular product.
Maxing out a credit card can also damage your credit score as the major financial institutions use a credit card debt utilization ratio to decide whether or not to give a customer further credit. Typically, if you have used more than 50 to 70% of your existing credit facility, it may be seen as a red flag and will damage your credit score and reduce your ability to obtain further credit.
Credit card churning can be a risky practice as it relies on being able to successfully apply for a second card. If the applicant is unable to obtain a second card, they may be left with substantial debt that will start being charged at the new higher percentage rate.
