What is the credit cycle? Understand when it happens and if it’s worth it

The credit cycle is a phenomenon intrinsic to contemporary economic systems, exerting a profound and multifaceted influence on various aspects of financial life. 

Understanding its dynamics is essential for individuals, businesses, and governments wishing to successfully navigate the world of finance. 

In this article, we will show in detail what the credit cycle is and how it works. Follow along and find out.

So, what is the credit cycle?

Credit cycling occurs when you completely exhaust your credit card limit, pay off the full balance, and then make more purchases (or even reach the limit again) several times during a single billing period. 

In essence, it involves repeatedly using your entire credit limit within a single billing cycle to artificially increase your credit limit. 

It’s important to note that cycling credit is not the same as simply paying the full amount of the bill before the due date, nor is it about making multiple payments throughout the month. 

Cycling specifically involves depleting your credit limit, paying off the balance, and repeating this pattern several times within the same billing cycle.

Understand how the credit cycle works in practice

In practice, the credit cycle encompasses several stages that a company follows when granting credit to customers. 

Firstly, there is the prospecting phase, in which the company defines the profile of the ideal customer based on criteria such as age, income, and credit history. 

Next comes the credit analysis, where the company evaluates the customer’s ability to pay through inquiries to credit protection agencies and analysis of documents such as payslips and proof of residence. 

After approval in the credit analysis, the company grants credit to the customer and establishes the terms of the contract, such as credit limit, interest rate, and payment term. 

The customer can then use the credit to make purchases from the company, with it being crucial that the company offers quality service during the sales and after-sales process, solving any problems that may arise. 

Finally, it enters the collection phase, where the customer is responsible for paying the outstanding balance according to the terms of the contract. 

The company must have an efficient collection policy to ensure receipt of payments. 

A practical example of this cycle is when a customer applies for a credit card at a bank.

After analyzing the credit history, the bank decides to grant a credit with a limit of $1,000. 

The customer uses the card to make purchases totaling $800. At the end of the month, the customer receives the card statement with the amount of $800 to be paid. 

They can choose to pay the full amount of the bill or pay in installments, and if they opt for installment payments, interest will be charged on the outstanding balance.

Are there benefits in practice?

Yes, there are benefits to practicing the credit cycle, but it’s important to understand that this strategy can be risky if not done consciously and responsibly. 

• Increased credit score: By paying off your credit card balance before the due date, you can increase your credit score. 
• Improving your credit profile: By having a good payment history and low credit utilization, you demonstrate to creditors that you are a good payer. 
• Access to better interest rates: When you have a good credit score, you can access better interest rates on credit products, such as credit cards, loans, and mortgages. 
• Possibility of obtaining more benefits: Some credit cards offer benefits such as cashback, loyalty points, and free insurance. By cycling your credit, you can take advantage of these benefits more effectively.

Learn about the disadvantages of the credit cycle

The credit cycle, also known as “revolving credit,” can be a useful tool for managing your finances and increasing your credit score. 

However, it’s important to be aware of the disadvantages before using this strategy. 

• Indebtedness: If you are unable to pay off your credit card balance each month, you may become indebted. 
• High interest rates: If you do not pay off your credit card balance on time, you will have to pay interest on the outstanding balance. 
• Damage to your credit score: If you are late or fail to pay your bills, this may damage your credit score. 
• Difficulty in controlling spending: The credit cycle can make it difficult to control spending, as you may end up spending more than you actually have. 
• Risk of fraud: By making frequent payments of the outstanding balance, you increase the risk of fraud, as your banking information may be exposed. 
• Time and effort: The credit cycle requires time and effort to be done correctly. You need to closely monitor your transactions and make frequent payments. 
• Not a solution to financial problems: The credit cycle is not a solution to financial problems. If you are having difficulty paying your bills, it’s important to seek professional help.

Are there alternative strategies?

Yes, there are several alternative strategies to the credit cycle that can be employed to improve financial health and increase credit score. 

One of the most important strategies is to pay all bills on time, including credit card bills, loans, mortgages, and utility bills. 

Additionally, it’s essential to maintain a low credit utilization ratio, which is the percentage of available credit limit being used. Keeping this ratio below 30% can help improve your credit score. 

Negotiating outstanding debts with creditors can also be an effective strategy to reduce the amount of debt or the interest rate, which can improve your credit score and alleviate financial burden. 

Avoiding applying for too much credit in a short period of time is another recommended practice, as this can be interpreted as a risk signal by creditors and harm your credit score. 

Regularly monitoring your credit history is essential to identify errors and ensure that your credit is in good shape. 

This can be done by obtaining free credit history reports from agencies such as Experian and Equifax. 

When using credit cards, it’s important to act responsibly by making full payments of bills whenever possible and avoiding maxing out the credit card limit. 

Now that you know what is the credit cycle, it’s important to analyze your profile and whether it’s worth using. So, follow our page for more credit tips for you!