Several years ago on a lazy Sunday morning when I was procrastinating vacuuming and laundry, I stumbled across the subreddit Churning. I’d seen a few mentions of it before in some of the other personal finance corners of Reddit, but I’d never actually ventured into it before. One click and my morning went up in smoke, as I realized with a little bit of organization I could turn credit card spending into several thousand dollars of tax-free side income per year.
Most of you savvy people reading this already know that using a credit card for every purchase possible makes a lot of financial sense, even when you have the cash at hand. Not only does having credit cards build your credit history and help improve your credit score, but the cash back is often nothing to sneeze at either, especially if you like to travel. However, there is another level to the advantages of credit cards if you are willing to put in a little bit of time and have at least some semblance of organizational skills.
So, where does that several thousand dollars of tax-free side income come from? I present Frugal Paradise Churning Questions and Answers:
What is churning?
Churning is when you open a credit card primarily for the sign-up bonus. It is very easy to find credit card offers that will give you upwards of $500 in rewards for meeting a certain minimum spend over a period of 1-3 months.
What’s in it for the credit card companies?
Simply put, credit card companies offer sign-up bonuses because they sound awesome, which attracts lots of new customers, which in turn means bank for the card issuers. The cost of the sign-up bonus is offset by several factors. Of course, the company will get a small percentage every time you use the card, but the biggest incentive for them is with people who are unable to manage the card properly:
- Not meeting the minimum spend. If you don’t spend get the minimum spend in the time frame allotted, you don’t get the sign-up bonus at all!
- Annual fee. Almost all of the cards with the best sign-up bonuses have an annual fee. Many cards waive the fee the first year, but if you forget to cancel you might be looking at a ~$100 loss (or more).
- Interest. You know never to pay interest on your credit card bill, but LOTS of people don’t follow this rule. The credit card companies more than make up for $’s lost in bonuses through interest paid.
What are the best credit cards?
This is skipping to the punchline a little bit, but if you’re ready to go, check out the giant churning spreadsheet from Reddit, which has a huge list of credit cards and their current offers. Right now I’m rocking the Chase Sapphire Preferred and the Chase Hyatt. I picked up the Hyatt card because we are thinking of taking a trip this summer, and the bonus was two free nights at ANY Hyatt hotel plus a $50 statement credit. The Sapphire card, besides making me look fancy because it’s made of metal, will net $550 cash or $687 in travel rewards. The requirements are to spend $4000 in the first three months (and add an authorized user for that extra $50). The Hyatt card requires a spend of $1000 in three months. Both of these cards have an annual fee that is waived the first year, so they’ll be getting cancelled when the one-year anniversary approaches. The Hyatt card actually offers a free night every year, so I’m considering that it might be worth keeping despite the $75 fee.
Personally, I like keeping most of our cards with Chase because we have a Chase bank account, it’s easier to manage cards all in one place, and our personal info isn’t floating around at tons of different banks. Chase has lots of awesome credit cards, but they do have a 5/24 rule, which is that you will get automatically rejected on your 6th card within 24 months. If you and your significant other are both applying, you can bump this to 10/24, and really, that’s probably enough unless you are really getting into it.
Can I get the bonus more than once?
Yes, you can. Most cards allow you to reapply and get the bonus again after a certain period (Chase is 24 months) from when you received the bonus the first time. Check the fine print. Another way to repeat the offer is to sign up your spouse or significant other. You can both apply as primary cardholders and both get the sign-up bonus.
I can’t meet the minimum spends, what do I do?
Buy more stuff! (just kidding) We put a ton of extra expenses on personal credit cards that we would have otherwise paid with other means just to do churning. Here are some ideas:
- Work expenses. I have a work credit card that is paid directly by my employer, but instead of using it I use my personal credit cards and get reimbursed. They don’t seem to care and it nets me about $600 / year with sign-up bonuses and points.
- Taxes. This is a big one. Our property taxes are about $7000 per year and we also had an $1100 state income tax bill (oops) this year. There is a 3% fee to pay the property tax by credit card and a 2.35% fee for the income tax. This amounts to about $236 in fees. The 1% cash back on the cards reduces this to $155. With ~$8000 worth of spending, I can complete two different $4000 minimum spends and earn about $1000, making the fees well worth it. Too bad you can’t pay your mortgage with credit! I wish I had figured this out earlier and paid our apartment rent with a card. I always avoided this because the fee was 3%. All those lost $’s!
- Gift cards, primarily Amazon for us. This is a good way to eek out some extra spending if you are running out of time. Just make sure that it’s money you would have spent anyway. Also, sometimes Amazon offers $5-$15 rewards for reloading your account balance with $100. This was doubly awesome last September – December when Chase Freedom was offering 10% back on all Amazon purchases.
Is churning right for me?
Making money this way does have its risks. Churning might be a good strategy for you if the following are true:
- Most important: you pay off your credit cards in full every month
- You aren’t looking to take out a loan in the next 6-12 months. Opening credit cards puts a hard inquiry on your credit report. The effect on your credit score is hard to predict, and depends on your past credit history and the amount of credit you have available vs how much you are using. However, you don’t want to apply for a mortgage and have your lender see that you just applied for 5 credit cards in the last couple of months. Take a break (or don’t start) churning if you have plans for a new mortgage or a car loan in the near future. This is also applicable if you are applying for a new job or new apartment soon.
- You don’t mind keeping closer tabs on your spending and filling out a spreadsheet to track where you are with your cards.
- You spend enough money each month to meet the minimum spend amounts. Unless you are a serious frugal rock star, you probably spend enough to meet most of the limits, especially if you only work on one card at a time.
Don’t I have to pay taxes on this income?
No, in most cases you are free and clear! As long as you had to do some kind of financial action to get your reward, the IRS considers the money a “discount” and it is not taxable. There is a nice explanation on Bankrate.
Can I get more advanced?
There are lots more ways to get even more credit card rewards, especially if you are into travel. Credit card points and rewards are often more valuable when you exchanges them for airline tickets and hotel rooms. There are also more ways to increase your spending artificially, called “manufactured spending”. For a much more exhaustive FAQ and more details, check on the wiki on r/Churning. Below are some more resources as well. Have fun!
- Reddit Churning
- MMM weighs in: Credit Card Churning: for Mustachians or Sucka Consumers?
- Doctor of Credit: List of Churnable Credit Cards
- Money Manifesto: Best Credit Card Sign Up Bonuses, Updated Monthly!
- TravelSort: Best Travel Rewards Credit Cards Bonus Offers – February 2016
- Cash Cow Couple: Manufactured Spending Techniques with Gift Cards