Consumers often find themselves in various predicaments with their credit cards, from failing to make full monthly payments to accumulating overwhelming balances. However, a lesser-known, yet perilous behavior known as “credit cycling” has emerged as a growing concern among financial experts.
Credit cards typically come with a designated spending limit, a figure consumers are usually aware of, which dictates how much they can borrow. This limit is refreshed upon full and timely payment each billing cycle.
Individuals who engage in credit cycling often hit their credit limit, swiftly pay down the balance, and thus create more available credit to exceed their regular spending constraints.
While infrequent credit cycling might not pose significant risks, experts, including Ted Rossman, a senior industry analyst at CreditCards.com, liken it to minor speeding—an action less likely to draw attention from law enforcement.
However, consistently maximizing available credit can lead to significant drawbacks, Rossman warns.
For one, card issuers may terminate accounts or revoke reward points for users exhibiting this behavior, which can subsequently damage a consumer’s credit score.
Bruce McClary, senior vice president at the National Foundation for Credit Counseling, cautions against credit cycling, recommending consumers to avoid it and seek alternative financial strategies if there’s even the slightest risk involved.
Card issuers perceive credit cycling as a risk
As of the second quarter of 2024, the average credit card limit across American consumers stood at approximately $34,000, according to Experian, one of the leading credit bureaus.
This figure varies by generation and is influenced by factors such as income and credit usage, as noted by Experian.
Understanding why some consumers might resort to credit cycling is crucial. Many individuals may find themselves with relatively low credit limits, using this tactic to afford significant expenses like home repairs, weddings, or travel. Others might employ credit cycling as a way to quickly accumulate rewards and points, experts explained.
Yet, frequent cycling could raise red flags for card issuers, Rossman added.
Regularly maxing out a credit card might violate specific terms of service or signal a user’s financial struggles, suggesting difficulty in managing their budget. This behavior may also provoke suspicions of illicit activities, such as money laundering.
“Presenting yourself as a financial risk can lead to serious consequences,” McClary stated.
Consequences of credit cycling
Card issuers that penalize customers for credit cycling by closing accounts may induce a downturn in the user’s credit score, experts explain.
Credit utilization—reflecting the relationship between outstanding debt and credit limit—plays a critical role in credit scores. Maintaining low utilization is typically advised for enhancing credit scores, while excessive rates may be detrimental, according to McClary.
Experts generally suggest keeping credit utilization below 30%, ideally under 10% for optimal score improvement.
When an account is closed, the overall credit limit decreases, increasing the risk of elevated credit utilization for users who have outstanding balances on other cards.
Moreover, card companies might cite misuse as grounds for account termination, further complicating perceptions among future creditors regarding the user’s reliability.
Frequent use of credit to its limits heightens the risk of unintentionally exceeding that threshold, which may incur over-limit charges or increased interest rates.
Consumers practicing credit cycling should remain vigilant regarding recurring payments or charges that may inadvertently push their balances beyond set limits.
Alternatives to credit cycling
Rather than resorting to credit cycling, consumers may find it more beneficial to request a higher credit limit from their card issuer, initiate a new credit card account, or distribute payments across multiple cards, according to Rossman.
Rossman also advocates for timely repayment of credit card bills during the billing cycle rather than at the end. This approach differs from credit cycling, as it focuses on managing expenses without exceeding credit limits.
Such proactive measures can enhance credit utilization and, in turn, positively influence a credit score since card balances are generally reported to credit bureaus at the close of billing cycles.
“This strategy can yield better credit scores, especially for frequent card users,” he stated.
