One of the benefits of having a credit card is the ability to earn rewards points by managing purchases. While this is an advantage, falsely inflating your credit limit can significantly impact your credit score or ability to use the card. Credit cycling is a practice used by some to expand their spending power. Here’s why you may want to avoid it.
What is cycling your credit?
When you apply for a new credit card, the bank attaches a specific credit limit to your account. This limit is based on factors like income, credit score, and credit utilization. Credit card cycling transpires when someone reaches that limit, then pays it off, and makes additional charges within a single statement period.
For example, let’s say you were approved for a $5,000 credit limit on a new card. After receiving the card, you spend $4,990 on new furniture, leaving you with $10 in available credit. Later that week, you pay off the $4,990 balance and then spend an additional $4,900. Over the course of one billing cycle, you have spent nearly $10,000 on a $5,000-limit card. In practice, this exceeds the spending power awarded to you.
Credit card cycling: Pros and cons
Cycling your credit may seem like a harmless way to manage your spending. The practice isn’t always necessarily nefarious. There are some benefits to doing it.
Here are some positive aspects of credit cycling.
Helps you cover your bases: Depending on the credit card, cycling may help you pay for your needs in a month. If your credit limit is low relative to your living expenses, this can aid you in managing bills.
Achieves sign-on bonus sooner: Did you recently receive a new rewards credit card and you want to earn the bonus as quickly as possible? Cycling your credit can help you earn the bonus within one billing cycle instead of the full 90 days usually given.
Help you earn more rewards: Some credit cards may let you earn more rewards within a given statement period. Using the credit cycle to your advantage may help you optimize earnings.
This said, credit card cycling doesn’t always yield good results. These are some drawbacks to the practice:
You may impact your credit score: In reality, cycling needlessly increases your credit utilization ratio. If the bank reports your information to the credit reporting bureaus at the right time, it may negatively harm your credit score.
Risk of account closure: Everyone makes mistakes, and errantly cycling your credit once or twice may not raise any red flags with the bank. However, if you make it a common practice, the bank may choose to close your account.
Loss of rewards: If you cycle your credit to abuse rewards categories, the bank can take back rewards.
Why banks discourage credit cycling
Banks are notoriously risk-averse. An institution reviews numerous factors upon receiving your application to decide on your credit limit. This is the maximum they want you to spend in a given billing cycle. When you credit cycle, it makes it more difficult for them to know your creditworthiness.
“It raises several red flags as it complicates the bank’s ability to assess true creditworthiness when balances fluctuate dramatically month to month; it doesn’t show any stability, just chaos,” says Adam Ennamli, chief risk and security officer at the General Bank of Canada. “The pattern often mimics signs of financial distress or potential money laundering, triggering both financial risk and compliance concerns.”
While the practice may not be purposely fraudulent on your part, it’s often considered an abuse of the system in the eyes of a bank. If you find you need a higher credit limit, most banks would prefer you inquire about a credit line increase rather than cycling your credit.
Alternatives to credit cycling
Ultimately, credit cycling results in a false sense of an increased limit on your card. Thankfully, other options are available to aid in growing your spending power.
These are the top alternatives to credit card cycling:
Credit limit increase: Some cards may offer this automatically, on occasion. If you don’t see it available on your card, call customer service to inquire about a credit limit increase. The representative may ask a few questions, but it’s not a difficult process.
Apply for a new credit card: If you have a good credit score, you may want to consider getting a new card. This increases your spending power without putting your current card at risk of closure.
Move credit limits: Do you have multiple cards from the same issuing bank? If you do, it may be possible to move part of your limit between cards. Move the limit to the card you use typically use, especially if it’s a rewards card.
Frequently asked questions about credit cycling
Determining what is credit cycling and avoiding it is important in managing your cards. These are common questions people have about cycling credit.
Does credit cycling impact credit score?
Cycling credit can negatively impact your credit score. It depends on when the respective bank reports to credit bureaus and may make it appear that your credit utilization ratio is too high. “The credit score impact can be severe, even when payments are made in full, scores can drop by 50 points or more due to cycling behavior, says Ennamli. “Contrary to many misconceptions, this occurs because individual credit scoring models interpret frequent high utilization as a risk factor, regardless of payment history.”
How often can I pay my credit card balance in a month?
You can make payments towards your credit card as often as you want. However, it’s essential not to do so in a way that makes it appear like cycling behavior. For example, some people may make bi-weekly payments to help keep their utilization low and credit score high while also aiding in budgeting.
How long is a credit cycle?
The billing cycle on most credit cards is commonly between 28 and 31 days. You may see it fluctuate by a day or two, but it’s typically one month in length.
The bottom line on credit cycling
Credit card cycling may seem like a harmless activity. In fact, some people may find they’re able to do it without issue. Though, it’s not a practice without risk. Banks often frown upon cycling and may even close your account if you do it regularly. It’s often better to request a credit line increase or move limits between cards to remain in good standing with your bank.
