Increasingly used by consumers as they drain through their available credit limits, credit cycling is a risky practice that many consumers ignore. Financial counselors and credit experts say this move will provide short-term relief on expensive items, but at a cost. In the long run, it can endanger your credit score and overall financial well-being.
Take heed, says Bruce McClary, spokesperson for the National Foundation for Credit Counseling, of risky, neverending “churning” through existing credit. One, he stresses, because the consequences can be financially catastrophic. He warns that this practice can be highly detrimental, up to and including putting yourself at risk of ruining your credit score. “If there’s even the slightest chance credit cycling can go sideways, it’s best not to do it and look for alternatives,” McClary advises.
Credit utilization is the percentage of available credit you’re currently using. Yet it is the most important factor in calculating your credit score. Experts typically advise keeping a credit utilization ratio under 30% to prevent unnecessary damage. If you’re trying to raise a low score, credit utilization should be below 10% at most. In fact, a high utilization rate, which McClary cautions against, can drop your credit score by 100 points.
Consumers are frequently credit cyclers, which can drive them to put high-ticket items on their credit cards. Costs such as home repairs or weddings become easy marks for these fees. This offers short-term financial relief, but it often carries the danger of going over credit card limits. As McClary warns, the more often we press these boundaries, the more likely we are to inadvertently step over them. This may incur more payment plan fees or even collection agency penalties.
On top of this, card issuers are becoming more strict in identifying “chronic churners” who are known to abuse the credit treadmill. Ted Rossman, an industry analyst at CreditCards.com, warns that lenders can see this behavior and interpret it as a red flag. This perception affects borrowing opportunities dramatically. This kind of scrutiny might prompt card issuers to close accounts. They could cancel rewards points, adding additional wallet-busting pressure on consumers.
To avoid these risks, experts recommend better, more cost-effective interventions. Instead of relying on credit cycling, consumers may benefit from requesting higher credit limits from their card issuers or opening new credit card accounts. These are some safer approaches that can increase total available credit without exposing consumers to the damaging effects of high utilization rates.
Paying down card balances early in the billing cycle is another best practice. Rossman encourages consumers to consider paying off their credit card bills in the middle of the billing cycle rather than waiting until the end. This practice will lower the average utilization rate and can improve your credit score in the long run.
Consumers should be aware that cancelling a credit card may result in a decreased total credit limit. This action can unknowingly increase their utilization rate. The higher the utilization rate, the more likely they are to hurt their credit score. Thus, knowing how various transactional behaviors impact credit utilization is important to avoiding the penalization of a potentially healthy financial profile.
McClary captures the moment perfectly. Far from being a risk to others, as you might seem, by being a risk you may actually be making yourself a target. This finding acts as a warning shot across the bow of consumers who might be lured into the practice of credit cycling.