Photographer: Finlay MacKay via Bloomberg Businessweek
Recently, churning has been pushed into the limelight a lot more than most in the community would like. The Wall Street Journal has had a series of peculiarly positioned articles on the subject. B In the past six months, WSJ has published no fewer than nine articles relating to the subject. The most recent, If You Have 29 Credit Cards, You’re Probably a Millennial, took a rather critical view of the whole activity. Bloomberg even made a churning-related article their cover. The comment section shows the level of ignorant malice that still exists towards those that take advantage of the credit system even among a highly educated audience.
Adam Hendricks – “If you have 29 credit cards, then you’re a darn fool.”
Or very intelligent. Most people who can’t keep up with their payments would not be able to make it to 15 cards, let alone 29.
Carroll Melton – “If these people ever manage to accumulate any real assets, they probably would let Bernie Madoff manage it for them.”
If you look at the annual survey statistics run on /r/churning or FlyerTalk, the majority of churners fall into higher income brackets, presumably with correspondingly larger amounts of assets. They are doing just fine.
Pauline Plast – “Gaming the system. As noble a way to earn a lifestyle as being an investment banker, I guess.”
The game isn’t the game. The rules are the game. This applies to anything in life. Also, I’m touched. You just confirmed that I am pursuing the right career.
James Stewart – “This articles appears to substantiate my personal view that millennials are not going to be very positive for the future of the USA as a soundly-managed country.
Besides all these credit card end-arounds, a many millennials abuse drugs, don’t they?”
Ok. Ok. The Greatest Generation made Social Security and Medicare insolvent, spent trillions in debt, and burdened us for generations, but having too many credit cards is going to be our downfall? Drugs. Where in the hell did drugs come into this? I don’t think it’s possible to violate Grice’s Maxim of Relevance more than this.
Now that we know these commenters were clueless, we have to ask the question: Are these opinions really bad? Churning basically works on the principle that the vast majority of consumers do not have the time, will, or knowledge to profitably take advantage of the rewards system. Those “average” consumers transfer wealth to the financial institutions, often lured in by the promise of free vacations or cash back, but never achieve it. They are the revenue positive individuals that banks want to lure in with these offers. They make the hobby possible.
Churning is essentially a vampiric transfer of wealth gleaned from those less savvy individuals through the financial institutions, and finally to churners. So long as it remains overall profitable to offer such steep rewards, the system will continue. This requires that the vast majority of consumers are profitable customers. Successful churning cannot become a hugely widespread activity. Rewards will be lowered until it is no longer profitable to churn. This is a fundamental principle of economics. Wherever there is an arbitrage opportunity in a market, money will flow there until the opportunity ceases to exist, and an equilibrium is found. This one of the main principles of floating exchange rates. The only moat keeping this arbitrage opportunity open is the sheer effort, time, and knowledge required to profitably churn.