What Is Credit Cycling? and Why You Should Avoid It

I've mentioned how you should pre-pay your credit cards to increase your credit score in a few posts, and one frequently asked question is, "will the banks get mad?"

Answer: no, unless you're credit cycling.

What is Credit Cycling?

Credit cycling is when you spend more than the card's credit limit in a month by pre-paying during the same month. 

For example, you  have a credit card that has a $5,000 credit limit, and the statement opens on July 1, and closes on July 31. 

Assumptions

  • Statement opens/closes: July 1 / July 31
  • $5,000 limit

Cycling

  • July 5 = spends $4,000
    • July 10 = pays $4,000
  • July 12 = spends $4,000
    • July 15 = pays $4,000
  • July 17 = spends $4,000
    • July 20 = pays $4,000
  • July 25 = spends $4,000
    • July 27 = pays $3,999

This is an issue if you spend $16,000 on the same card, when you credit limit is only $5,000.

  • Total monthly spend = $16,000
  • Credit limit = $5,000

When you spend more in a month than your credit limit, and pre-pay to spend more than the limit, this is known as credit cycling.

  • Spend in month > limit = cycling

For our purpose, pre-paying cards is good because it lowers our credit utilization. 

However, banks are worried about money laundering when you show  credit cycling behavior. For example, bad actors could use credit cards to funnel money for "products" or "services" that don't exist, for the purpose of "washing" illicit funds.

Again, for normal people, don't worry too much, especially if you're early in your credit journey and have a credit limit of $500.

Why?

Your transactions are immaterial for anti-money laundering (AML). Banks are usually looking at $10,000+ transactions. AML technically looks at cash transactions, but many risk systems monitor for "merchant-based money laundering" as well.



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