These days, it’s not uncommon for individuals to open a bunch of credit cards in a short span of time to acquire lots of points and/or cash back. Those who do it on a serial basis are known as churners.
They basically open and close credit cards constantly to take advantage of the benefits without having to deal with the drawbacks, namely annual fees and finance charges.
But you’ll often hear even the most hardcore churner say they’re pumping the brakes because they plan to buy a home, or they’re thinking about refinancing the mortgage (next year). Next year? Seriously?
To Risk It or Not Risk It
- While the fears of credit card churning might be overblown
- You do have to tread cautiously here
- Ultimately a mortgage approval
- Will outweigh any credit card bonus you might receive, so it could make sense to wait
So, does credit card churning put your mortgage approval at risk, or is the whole thing overblown?
There are probably two camps on this one, but I generally think churning itself isn’t a huge problem, though it might be a nuisance. Allow me to explain.
When you churn, you’re often asked to spend X amount in the first few months. This means racking up spending and increasing your outstanding debt, even if only for a limited time.
As I’ve mentioned before, your credit scores can plunge simply from spending a lot on your plastic, even if you pay it off in full by your due date.
Put simply, it freaks out your creditors when you go on a spending spree, at least temporarily. And as such, your credit scores might take a temporary hit.
This happened to me a year ago, which is why I cautioned readers to avoid swiping before applying for a mortgage.
That’s one risk – if you churn, you could get caught out so to speak, even if your balances are all paid off by the time you apply for a mortgage.
It’s take time for credit scores (and reports) to get updated, so if the timing is bad, you could put your mortgage in jeopardy, or at least wind up with a higher mortgage rate.
That higher rate could cost you a lot more than you earned churning, kind of defeating the purpose of the whole endeavor.
The other risk is underwriter scrutiny. If you open a bunch of credit cards before applying for a mortgage, you better believe the underwriting department will hear about it.
They’ll also want clarification as to why you opened the cards, what the current balances are, etc. In short, it’s going to create unnecessary conditions, letters of explanation (LOEs), and more headaches.
For me, that’s almost the worst part. Sure, a higher rate is way worse than some underwriter scrutiny, but having to scan and sign LOEs to account for your recent credit card applications is just plain tedious.
Recently Opened Credit Cards and Your Mortgage
- While you might not be declined for a mortgage if you churn
- It could complicate matters if you open a lot of new credit cards
- You might need to provide a letter of explanation
- And it could potentially lower your scores enough to raise your mortgage rate or DTI ratio
That being said, I’m not fully against credit card churning prior to getting a mortgage. There’s a decent chance a recently opened credit card (or two) won’t hurt you one bit.
Your credit scores could easily remain steady, or even rise due to better credit utilization (thanks to those new open and available credit lines).
And while everyone seems to get into a tizzy over credit inquiries (applications for new credit), they actually don’t seem to impact credit scores very much for most people. It’s usually 5-10 points, if that, and fleeting.
Also, the LOEs aren’t that hard to complete, despite being a hassle.
One thing you can do to minimize the impact is to pay down all the balances before you apply for the mortgage. That may boost your credit score, and it could also increase your purchasing power because those minimum monthly payments won’t count against you if they’re zero.
If You’re Unsure, Waiting Might Be the Best Move
- If you know you’ll be applying for a home loan in the near future
- Whether it’s in the next week or even a few months out
- It could be wise to hold off on that credit card application
- Chances are you’ll still be able to apply after you get your mortgage so why not just be patient
In summary, if you want to continue churning, it’s your choice. But be sure to know the risks involved, and that you might have some explaining to do.
If you plan to apply for a mortgage next week, next month, or conservatively 90 days out, you probably shouldn’t apply for a new credit card today. Just be patient, don’t play with fire.
However, if you plan to get a mortgage next year, or six or more months down the line, it’s reasonably safe to apply for a new credit card if you really want one.
Just know that any new debt will reduce how much house you can afford and could hurt your credit score. So be responsible and practice moderation with your new credit card, as you would anything else.
Otherwise it could come back to haunt you if your DTI is maxed out or your credit scores dip enough to push up your mortgage rate. Ultimately, be sensible here and practice moderation and you should be OK.
P.S. If you want the points without the risk, Chase is offering 100k Ultimate Rewards when you take out a mortgage. That’s one way around this potential mess, though again not the greatest idea out there if another lender is offering better pricing.
Ironically, a hardcore churner might actually pay the mortgage with a credit card to meet a minimum spending requirement and/or earn lots of points and cash back. That would be the ultimate win.