Understanding the Risks of Credit Cycling

Credit cycling is when a cardholder maxes out their credit card, pays it off, and then maxes it out again within the same billing cycle. For instance, let’s say your credit limit is $5,000 and you spend $5,000 booking a family vacation, then repay the $5,000 on your balance a few days later. Then, you spend another $5,000 as a down payment on a new car within the same week. Even though your credit limit is $5,000, in a few days’ time, you’ve spent $10,000 using your credit card.

At face value, credit cycling can seem like a savvy way to maximize your available credit. However, beneath the surface, credit cycling can have serious consequences for your credit health.

• Red Flags for Lenders

   

  Before assigning you a credit limit, lenders analyze your credit report, income, and debt obligations. So, your credit limit usually reflects the amount your card issuer is comfortable with you spending. By frequently credit cycling and manipulating your credit limit, you’re spending more than your lender thinks is within your capacity. They could suspect you’re experiencing financial difficulty or are part of illegal activity.¹

   

  Account Closures or Limits

   

  Credit cycling could breach some card agreements, and lenders may penalize you for it.² Penalties differ, but may range from revoking your rewards to closing your account entirely.³ If your account is closed, it may make you look riskier when you apply for future credit accounts. It can also raise your credit utilization across other accounts, which could lower your credit score.⁴

   

  Impact on Credit Score

   

  If you have a high balance relative to your credit limit when your credit activity is reported to credit bureaus, you could hurt your credit score. Card issuers typically record credit activity toward the end of your billing cycle, so you may sometimes be able to avoid high credit utilization affecting your score if you pay down your balance before it’s reported.⁵ However, you may not know when your credit behavior is recorded, and if you’re maxing out your card frequently, you risk being unable to pay down your balance in time.

The effects of frequent credit cycling can reverberate through your financial well-being. Some people who credit cycle can develop a dependency on credit for everyday expenses because they use most of their funds to pay off their credit card balance. Relying on credit can lead to mounting debt, higher stress, and difficulty managing your cash flow.

Additionally, if you fall behind on paying down your balance, your high credit utilization ratio could make it difficult to qualify for new credit cards or loans. And if your card issuer closes your account, it could raise red flags for other lenders in the future.

Fortunately, if you’re worried about falling into the habit of credit cycling, there are ways you can change your behavior before it’s too late, like lowering your utilization or creating a monthly budget.

• Manage Utilization Without Triggering Red Flags

   

  Unlike credit cycling, keeping your utilization low can help your credit and keep lenders happy. Some ways you can effectively manage your utilization include:

  • Using 30% or Less of Your Credit Limit
    To keep your credit score in a healthy state, it’s best to use no more than 30% of your credit limit. The best credit scores may reflect a utilization of less than 10%.⁶

  • Asking for a Higher Credit Limit
    If you’ve been managing your credit card account responsibly and have seen an increase in income or a decrease in debt, you may qualify for a credit limit increase.⁷ Increasing the amount of credit you have available to you can improve your credit utilization, provided that you don’t overspend with your new limit.

  • Paying Off Balances Strategically
    If you need to temporarily carry a higher balance, you may want to try to pay it down before the end of the billing cycle. If you know when your billing cycle ends, paying early may help avoid a high utilization rate being reported to a credit bureau and allow you to carry a lower balance from month to month.

  • Spreading Your Credit Utilization Out
    If you have more than one credit card, you may want to spread your spending across multiple accounts. That said, before opening multiple cards, you’ll want to make sure that you’re not stretching yourself too thin, that you can manage more payment due dates, and that you haven’t opened another account recently.

   

• Healthier Alternatives for Managing Short-Term Cash Flow

   

  Some people may start credit cycling because they’re having trouble managing their month-to-month financial obligations. Here are a few ways that you can manage your money better and avoid unhealthy credit cycling:

  • Build an Emergency Fund
    Unexpected expenses pop up, but credit cycling is a risky solution. If you take the time to build a dedicated emergency fund, you can stay prepared for any surprises that come your way and pay for them using your own money.

  • Use Budgeting Apps
    A budgeting app on your phone can help you easily track your spending and make decisions that fall into your financial roadmap.

  • Consider a New Loan
    If you have a large expense to cover, you may want to consider a personal loan if you qualify. However, make sure you can afford to repay the loan and consider how it could affect your budget in the future.