The Truth About Credit Card Cycling: Is It a Smart Strategy?

Are you an expert in the miles and points department and sporting a solid credit score? You might be thinking you know everything related to credit cards, but do you know about credit cycling? This practice is not uncommon in Canada as it can help stretch a modest credit limit. Sounds perfect, right? While the idea might be clever, it has some nuances to consider. In this article, we’ll define credit cycling practices, discuss why it might be useful, and identify the risks you need to be aware of before trying it out yourself.

What Is Credit Cycling?

Credit cycling is when you use your credit card until you reach the spending limit then pay it down and use it again, all before your billing cycle ends. Unlike simply making extra payments throughout the month, this practice uses the card to its maximum many times. The goal? Pushing your spending cap.

Let’s look at an example. Imagine your credit limit is $1,000 and you decide to book an all-inclusive weekend away on your credit card as you, understandably, want to take advantage of the card’s trip cancellation insurance. If the total cost of your trip was $990, you’re already close to your credit limit. The problem is that you also use your card to buy groceries, pay for gas, and cover your monthly subscriptions. Typically, these expenses cost you around $800 per month. So, to make room for these additional charges, you pay off the balance of $990, allowing your available credit to revert back to $1,000. Your credit limit hasn’t increased here, but you have allowed yourself to charge nearly $1,800 in a single billing term.

While this is a simple credit cycling example to help you understand the concept, true credit cycling is when you consistently max out your card, clear it, then max it out. Over and over again. This practice can be beneficial if you have a low credit limit and a large, one-time expense. But be careful! Your bank may interpret repeated credit cycling as risky behaviour, even if you are paying off your balance on time.

Why Do People Use Credit Cycling?

Based on our example above, you probably have a good understanding of why some people turn to credit cycling. Often, the practice can help Canadians with a lower credit limit stretch their dollar. Imagine, for example, that you’re a student and need to pay rent, your tuition, and your monthly bills. If you have a lower credit limit, you could run into trouble making these payments. Instead, you may find yourself making multiple payments to help increase your spending availability.

Another reason why Canadians use credit cycling is for points, especially when you have a new credit card and are trying to meet the minimum spending requirement to receive the sign-up bonus. In this case, you may want to spend more than your limit within the first few months in order to qualify for the bonus. But even without a sign-up bonus, Canadians may use credit cycling to help them earn points faster. While this might make sense, it can be dangerous without the cash flow to back up your spending.

Risks of Credit Cycling

Though you may not see any harm in credit cycling (I mean you just pay for something, free up space on your card, then pay again), be sure you have a complete understanding of the practice before you use it. A few things to consider are:

·       The impact on your credit score. Credit bureaus in Canada monitor your credit utilization ratio, or the percentage of your limit that you are using at the time of reporting. If you have been maxing out your credit card, your utilization may appear very high, in turn dragging down your credit score. Your score is an important factor in qualifying for other loans and credit products. For more information on ways to improve your credit score, see Finly’s article here.

·       Potential problems with the card’s issuer. Even if you make payments, your bank or credit card company may flag your account if they consistently see you credit cycling. In some cases, the issuer may reduce your limit, freeze your card, or even close the account entirely.

·       Perception of risky behavior. As I mentioned earlier, your issuer may view credit cycling as risky because it can appear like you are overextended or struggling with your cash flow. This perception alone could affect your ability to qualify for borrowing in the future.

Be careful! What may feel like a “hack” could easily backfire, leaving you with a lower credit score and fewer borrowing options.

Safer Alternatives to Credit Cycling

If the idea of credit cycling is starting to sound risky, that’s probably because it is. And the good news is that you don’t need to rely on it in order to manage your finances. There are much more sustainable ways to get the spending flexibility you want without jeopardizing your credit score. Consider the following instead:

·       Ask your issuer for a credit limit increase, especially if your financial circumstances have changed since you first applied. For example, if you have received a raise at work or have a better credit score now, your bank might be more than happy to raise your limit.

·       Redistribute your limit across cards. If you do not qualify for a credit limit increase, you can still ask the bank to make a change to the distribution of the limit. For example, you can request that they decrease the cap on one credit card by $500 and increase the limit on another, more frequently used card by that same amount. This can help you manage your finances or earn more points for redemption without needing additional credit.

·       Open another credit card (if you qualify). This option will give you extra cushion for your spending and even allow you to benefit from a new rewards program or promotional offer. Just be sure that you use both cards responsibly, make the minimum payment (or, ideally, more), and keep your credit utilization low.

·       Budgeting your cash flow. By planning ahead, you can develop a budget, track your spending, and ensure you maintain a balance below your credit limit.

Regardless of your cash flow situation, I encourage you to proceed with caution when it comes to credit cycling. Instead, use alternative options and build solid financial habits.

Final Verdict: Should You Do It?

Credit cycling might seem like a clever way to spend more without exceeding your modest credit limit. In some rare cases, it can actually serve this purpose. But if you are not making a large, one-time expense or trying to reach your sign-up bonus threshold, it can be a far riskier strategy than it is worth. From lowering your credit score to raising red flags about your spending behaviour, there are consequences to using this practice.

Instead of relying on this strategy, focus on safer, long-term options like requesting a credit limit increase (or redistribution) and budgeting for expenses. Even consider opening a new credit card under the right circumstances. Remember, the goal of any strategy should be to boost your financial health, not jeopardize it.