Rachel Rasker* looks as the risks of trying to ‘hack’ the credit card system for points and rewards.
Now borders are open again, there’s a tempting financial tactic trending that sounds too good to be true — credit card hacking.
As one finfluencer described, it allows you “to cheat the credit card system to travel anywhere for free, for the rest of your life”.
It’s popular on Reddit and TikTok, and promises plenty of exciting rewards.
But like any financial strategy, it also comes with risks.
Here’s what you need to know.
What is credit card hacking?
While the practice has been around for a while, credit card “hacking” or credit card “churning” as it’s known in the US, has seen a resurgent interest online.
As Angel Zhong, a senior lecturer in finance at RMIT explains, credit card hackers will “open a lot of credit cards to take advantage of the bonus points and welcome offers”.
“But once they receive these welcome offers [or before being hit with an annual fee] they cancel the card and repeat this process again and again.”
What are the rewards?
Many cards will offer cash back schemes, but using travel cards to gain travel points is one of the most popular methods of card hacking, especially when some cards include welcome bonuses like 120,000 airline rewards points.
One credit card hacker claimed to fly business class from Brisbane to New York for $150, while others love the free access to airline lounges many cards offer.
Some even include free travel insurance for the avid globe trotter.
What are the risks?
Damaging your credit score
When applying for a loan like a home loan, lenders will look at your credit score.
This is made up of the amount of money you’ve borrowed, how many credit applications you’ve made, and whether you pay on time.
Having a large number of credit inquiries (so applying for lots of credit cards) in a short period of time, or not paying them back on time, can hurt your credit score.
Dr Zhong says even just one credit inquiry can reduce your credit score in the short term.
“So if you are considering buying a house and getting a mortgage in the next six months, I would strongly advise that you don’t engage in credit card churning.”
“Financial adviser and mortgage broker John Cachia agrees the practice could be frowned upon by lenders; while it’s not illegal, it does involve “manipulating the system”.
But he says simply owning a few credit cards isn’t the same thing as churning through them — even if your aim is to gain travel points.
If you do own credit cards, he recommends reviewing them “at least twice a year” to make sure you’re getting the best benefits.
“But if you’ve got 10, or 12, or 15 [cards]? That’s a totally different style of behaviour,” he says.
“A lender might assume you’re using credit cards to pay off the old credit cards.”
He also points out lenders will look at the total limits available to you, not your outstanding balance.
So if you’ve got two credit cards with a $25k limit each open, that $50k is what will be included in your maximum credit limit, and might mean you can’t borrow as much on a home loan, for example.
Overspending
To attain those juicy frequent flyer points, cards will usually ask you to meet a minimum spend — something like $2000 or $3000 over the first few months.
In general, Dr Zhong warns you might end up spending more than you normally would just to reach these bonuses.
This is also why it’s a good idea to start slow, and avoid taking out a heap of cards at once — even just opening two cards at the same time might mean you need to spend $6000 in a few months to get anything.
Getting into debt
Like any financial product, Mr Cachia says it’s super important to understand the terms and conditions of a credit card before signing up.
It’s also essential that you keep track of your card — when are the repayments due? What about any annual fees? Are you on track to meet your minimum spend?
“We all know that credit cards, if you don’t repay on time, can be quite expensive,” Dr Zhong says.
So is it worth the effort?
For Dr Zhong, credit card hacking is “definitely” worth the effort for some people, given the rewards on offer.
She says credit card hacking can be worth it “if you have the time, the organisation skills and you can control your credit card usage in a prudent way”.
However, if those three things don’t apply to you, or if you’re looking to apply for a home loan in the near future — she advises against it.
This article contains general information only.
You should consider obtaining independent professional advice in relation to your particular circumstances.
*Rachel Rasker is a reporter at ABC Everyday.
This article first appeared at abc.net.au.
