How Much of Your Credit Limit Should You Use?

How Much of Your Credit Limit Should You Use? That’s a great question. The answer depends on a few things, but here are some general guidelines to help you make the best decision for your financial well-being.

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Introduction

It’s important to use credit cards responsibly in order to keep your credit score high and avoid debt. But how can you tell if you’re using too much of your credit limit?

One general rule of thumb is to keep your credit utilization ratio (CUR) below 30%. CUR is calculated by taking the amount of credit you’ve used and dividing it by the total amount of credit available to you. So, if you have a $1,000 credit limit and you’ve charged $300 worth of purchases in a month, your CUR would be 30%.

Ideally, you should keep your CUR even lower — around 10% or less. That’s because creditors see consumers who are using a large percentage of their credit limits as being higher-risk borrowers. If your CUR is too high, it could hurt your chances of getting approved for new lines of credit or result in you paying higher interest rates.

Of course, there may be times when it makes sense to use more than 30% of your credit limit — for example, if you need to make a large purchase and you know you can pay off the balance quickly. In general, though, it’s best to keep your CUR low to maintain a healthy credit score.

Your Credit Score

Your credit score is calculated based on your credit history, which includes things like your payment history, the amount of debt you have, and the length of your credit history. Using a large portion of your credit limit can negatively impact your score, even if you make all of your payments on time.

Ideally, you should aim to keep your balances below 30% of your credit limit. This will help to boost your score and improve your chances of getting approved for new credit in the future. If you’re trying to improve your credit score, paying down high balances is a good place to start.

Utilization

Utilization, or credit utilization, measures how much of your available credit you’re using. It’s one factor that makes up your credit score—the higher your utilization, the lower your score. That’s because using a large portion of your credit limit can be a sign to creditors that you’re struggling to manage your debt.

There’s no magic number for credit utilization, but using less than 30% of your credit limit is generally considered ideal. That means if you have a $1,000 credit limit, you should keep your balance below $300. If you have multiple cards with balances, keep each individual balance below 30% as well—a good rule of thumb is to never let any one card’s balance exceed $250.

Of course, the lower you can keep your utilization, the better. If you’re able to keep it below 10%, that’s even better. Anything in that range is considered excellent and will give you the best chance at qualifying for new loans and getting the best interest rates possible.

The 30% Rule

Most financial experts recommend following the 30% rule when it comes to using your credit limit. This means that you should never charge more than 30% of your credit limit at any given time. So, if your credit limit is $1,000, you should never have more than $300 charged on that card at one time.

There are a few reasons why this rule is important. First, carrying a balance that is close to or at your credit limit can hurt your credit score. This is because it looks like you’re maxing out your credit, which is a red flag to lenders. Additionally, if you do happen to carry a balance on your credit card, the lower your balance is in relation to your limit, the less interest you will accrue.

Of course, there may be times when you need to charge more than 30% of your limit (like during an emergency), but in general, it’s best to stick to the 30% rule to keep your finances healthy and avoid damaging your credit score.

Lower is Better

Ideally, you should keep your credit utilization ratio below 30%. That means if you have a $10,000 credit limit, you should keep your balances below $3,000. But if you’re trying to improve your credit score, it’s even better to keep your balances below 10% of your credit limit. So in this case, you’d want to keep your balance below $1,000.

The Exception to the Rule

There is one exception to the rule of not using more than 30% of your credit limit, and that’s if you have a new credit card. In order for your new credit card to gain a positive history, you have to use it. And in order for it to report to the credit bureaus, you have to use it and make at least the minimum payment on time each month. So, when you first get a new credit card, you may want to use 50% of your credit limit for a few months so that your new credit card can start gaining a positive history. Just be sure that you pay off the balance in full each month so that you don’t end up paying interest on your purchases.

Conclusion

From a financial standpoint, it’s best to keep your credit utilization ratio below 30%. This means if you have a credit limit of $10,000, you should aim to keep your balance below $3,000.

There are a few exceptions to this rule. If you know you’re going to make a large purchase (like a TV or appliance) that will put you over 30% utilization, it’s usually best to do that purchase just before your statement closes. That way, the balance won’t be carried over to the next month and will lower your overall utilization.

Another exception is if you’re trying to improve your credit score. In that case, it can be helpful to use up to 30-50% of your available credit so long as you pay off the balance in full each month. This shows lenders that you can responsibly use credit and makes them more likely to extend additional credit in the future.