How much of your credit should you use? It’s a common question, and one that has a lot of different answers depending on who you ask. In this blog post, we’ll explore some of the different factors that come into play when trying to answer this question.
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How Much Credit is Too Much?
Credit utilization is the ratio of your outstanding credit balances to your credit limits. It’s important to keep your credit utilization low — below 30% is ideal — because high credit utilization can hurt your credit scores. If you have a high credit utilization, you may want to consider paying down your balances or asking for a credit limit increase.
Your credit score is one of the most important factor that lenders look at when considering you for a loan. A good credit score means you’re a low-risk borrower, which could lead to a lower interest rate on a loan. A bad credit score could lead to a higher interest rate and could mean you won’t be approved for the loan at all.
One of the biggest factors in your credit score is your credit utilization ratio, which is the amount of your available credit that you’re using. Experts recommend keeping your credit utilization ratio below 30%, which means if you have a $10,000 credit limit, you should keep your balance below $3,000.
If you have a high balance on one or more of your cards, it’s important to pay down your debt as soon as possible. You can start by making small payments every month or by transferring your balance to a card with a lower interest rate. If you’re able to pay off your debt within a few months, you’ll likely see your credit score improve.
The 10% Rule
There is no magic number when it comes to how much credit you should use, but there is a general guideline that you can follow. The 10% rule says that you should keep your credit usage at or below 10% of your total credit limit. So, if you have a credit card with a $1,000 limit, you should keep your balance at or below $100.
This rule is a good guideline to follow because it will help you keep your balances low and help you avoid maxing out your credit cards. When you max out your credit cards, it can hurt your credit score because it signals to lenders that you are overextended and may not be able to make your payments on time. Additionally, maxing out your cards can lead to higher interest rates and fees.
If you are trying to improve your credit score or simply want to stay on top of your finances, following the 10% rule is a good idea.
How to Lower Your Credit Utilization
Credit utilization is one of the most important factors in your credit score—and one of the easiest to improve. Simply put, your credit utilization is the percentage of your credit limit that you use. So, if you have a $1,000 credit limit and a $500 balance, your credit utilization is 50%. For most people, the ideal credit utilization is below 30%.
Pay Down Your Debt
If you want to lower your credit utilization, one of the best things you can do is pay down your debt. By paying off some of your debt, you’ll automatically reduce your credit utilization ratio.
There are a few different ways to approach debt repayment. One popular method is the snowball method, where you focus on paying off your smallest debts first. Once you’ve paid off those debts, you can then use that extra money to focus on your larger debts.
Another option is to focus on paying off your high-interest debt first. This approach will save you money in the long run, as you’ll accrue less interest on your remaining debt.
Regardless of which method you choose, making extra payments towards your debt each month is a great way to lower your credit utilization and improve your credit score.
Request a Credit Limit Increase
If you’re trying to lower your credit utilization, one option is to request a credit limit increase from your creditors. You’ll need to have a good payment history with the creditor and prove that you can handle the increased credit responsibly. If your request is approved, your credit utilization ratio will decrease because your credit limit has increased without you using any additional credit.
The Impact of High Credit Utilization
If you’re using a lot of your credit, you may be hurting your credit score. Credit utilization is the second most important factor in your credit score. It makes up 30% of your score. That’s why it’s important to keep your utilization low.
Lower Credit Scores
While maxing out your credit cards can ruin your credit score, you don’t have to avoid using your credit cards altogether to keep your score healthy. In fact, using your credit regularly is one of the best ways to maintain a good credit score.
Your credit utilization — the amount of credit you’re using compared to your total credit limit — accounts for 30% of your FICO® Score☉ , so it’s important to keep it in check. Experts recommend using no more than 30% of your total available credit, and some recommend keeping it below 10%.
If you have a lower credit utilization, that means you have a lower risk of defaulting on your debt, which is good for your score. So, if you can swing it, it’s best to keep your balances low and make sure you’re not using more than 30% (or 10%) of your available credit.
Higher Interest Rates
When you have a high credit utilization ratio, it can cost you in the form of higher interest rates. That’s because lenders see you as a greater risk of defaulting on your loan or not making your payments on time. As a result, they may charge you a higher interest rate to offset that risk.
Difficulty Qualifying for Loans
When you carry a high balance on your credit cards relative to your credit limit (a.k.a. maxing out your credit card), it can hurt your score in two ways:
1)It lowers your score because it increases your credit utilization ratio, which is the second most important factor in your FICO® Score☉ . A high credit utilization ratio sends a signal to lenders that you might be struggling to pay your bills.
2)It also creates the potential for mistakes. For example, if you make a late payment on one of your maxed-out cards, it will have a bigger negative impact on your score than if you had plenty of available credit.