Credit cycling and how it can help or hurt you

Credit cycling is the act of using your entire credit limit during a billing cycle and paying it down so that you can continue using the credit card during that same cycle.

The benefits of credit cycling

Purchase protection

Credit cycling is extremely useful if you’ve been issued a credit card with a low credit limit. By paying down your credit card balance, you’re freeing up your credit card limit, which will allow you to enjoy the benefits of using your credit card.

You might think that this is pointless. After all, you’re simply using cash to pay your balance down so that you can use your credit card again. But, if your only payment options are a debit card and the credit card, it’s more practical to use the credit card. One of the benefits of using a credit card over other forms of payment is that credit cards offer consumers more protection. If you pay with a debit card, cash, or another cash equivalent (like a prepaid gift card or money order), your recourse is limited if something goes wrong with the transaction. But, with a credit card, your credit card company is there to help you resolve disputes.

Credit limit increases

It’s a catch-22. Your credit card company won’t issue a credit limit increase because they feel that you haven’t used the card enough. You don’t use the card because of the low credit limit.

However, in some cases, you can credit cycle to demonstrate the need for a larger credit limit. If your credit card company sees that you’re consistently using all of your $500 credit limit each month, paying it off, and going through the limit again in that same billing cycle, they may increase your credit limit.

In this case, credit cycling can potentially improve your credit score if your credit limit is increased to a level that lowers your credit  utilization rate.

Credit card rewards

Credit card companies often run promotions to entice customers to use their cards. It’s not uncommon to see credit card welcome bonuses that pay hundreds of dollars for spending a few thousand dollars in the first month or so of opening the card.

If your credit limit is $500 and your credit card company is offering a bonus for spending $1,000 in the first month, you can credit cycle by making $500 in purchases and paying off the balance. You can then make an additional $500 in purchases and reap the full benefits of the promotional offer.

However, by making the $500 payment during the billing cycle, you’d miss out on the credit card float for the first $500 purchase. You should calculate your opportunity cost to see if this strategy is worth it.

The downside of credit cycling

The downside of credit cycling usually impacts consumers employing manufactured spending tactics. Although you may be buying cash equivalents that can easily be paid back, your credit card company does not know that. They only know that you have a $500 limit, had $10,000 in purchases every month for 6 months, and reported income of $30,000 on your initial credit card application. It’s no surprise that this would raise red flags. 

Credit cycling also has the potential to harm your credit when your credit card company reports your high usage. This high usage can affect you in a number of ways.

If your credit card company reports your balance to credit bureaus while the balance is still relatively high, you could be penalized for having a high credit utilization rate.

It’s also important to remember that even if you pay off your balance before it’s reported to credit bureaus, your credit card company will still report your “high balance” during the billing cycle. Some companies use this data when deciding if they should issue credit to you. You may even find yourself in the uncomfortable position of explaining the high balance and cash flow to someone like a mortgage underwriter.

Nonetheless, it can be advantageous to use credit cycling as a way of turning lemons into lemonade when you’re given a credit line that’s smaller than you need. But, it’s important to use it appropriately, especially in the case of manufactured spending.