Credit cycling is a risky behavior that many consumers may not be familiar with. This practice involves reaching the credit limit on a credit card and then quickly paying down the balance to free up more available credit. While this may seem like a harmless way to increase purchasing power, experts warn that credit cycling can have negative consequences.
Ted Rossman, a senior industry analyst at CreditCards.com, likens credit cycling to driving slightly over the speed limit – it may not seem like a big deal at first, but it can lead to trouble if done consistently. Card issuers may view repeated credit cycling as a red flag, signaling financial instability or even potential illegal activity like money laundering.
If a card issuer decides to penalize a credit-cycling customer by closing their account, it can have a negative impact on their credit score. Credit utilization, which is the ratio of outstanding debt to credit limit, plays a significant role in determining credit scores. Keeping credit utilization low is key to maintaining a good credit score, but maxing out a card frequently can push this ratio higher and hurt one’s creditworthiness.
In addition to potential credit score damage, repeatedly hitting the credit limit can also result in over-limit fees or increased interest rates. This can further strain a consumer’s financial situation and make it harder to manage debt effectively.
Instead of credit cycling, experts recommend exploring alternative options such as requesting a higher credit limit, opening a new credit card account, or spreading payments across multiple cards. Additionally, paying down credit card balances early in the billing cycle can help reduce credit utilization and improve credit scores over time.
Overall, it’s important for consumers to be mindful of their credit card usage and avoid risky behaviors like credit cycling. By practicing responsible credit management and making informed financial decisions, consumers can protect their credit scores and financial well-being in the long run.
