How Much of My Credit Limit Should I Use? | Credit card

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Your credit limit tells you exactly how much money your credit card issuer will allow you to use without paying a penalty. You can use as much of your limit as you want, but that doesn’t mean you have to maximize your card. Here’s a rundown of what you need to know about your credit limit.

What Happens When You Use Your Total Credit Limit?

Maximizing your credit cards can hurt your credit score, even if you pay off your balances on time. Amounts owed are the second most important category used to calculate your FICO credit score, accounting for 30 percent of your score. Your credit utilization rate, the amount of credit you use against your credit limit, is an important metric. So, if you have a limit of $ 900 on a credit card and spend $ 450 during a bill cycle, your credit usage rate on that card would be 50%.

You need to be careful with the use of your credit on each individual account and on all of your credit cards. “The FICO score itself can look at credit usage on a single account, but it can also look at credit usage overall across multiple credit cards,” says Can Arkali, senior analyst and analyst. of the development of scores at FICO.

While there are no hard and fast rules about what an ideal utilization rate should be, a rate below 30% is generally recommended. On the other end of the spectrum, having a zero percent credit utilization rate isn’t ideal either. “Consumers with very low usage rates tend to be slightly more exposed to credit risk than those who don’t use any credit,” says Arkali.

You don’t need to have a balance on your credit cards to maintain a good credit utilization ratio. The FICO score only takes into account the balance that your lender reports to the credit bureaus. Typically, this is the balance from your last monthly statement, says Arkali.

What if you spent more than your credit limit?

If you find yourself facing a major emergency but don’t have enough credit to cover the expenses, you may be able to exceed your credit limit. Your credit card company may allow you to exceed your credit limit, but you may need to sign up specifically. In this case, you may have to pay an over limit fee and an APR penalty, depending on the terms of your credit card contract.

In addition to the negative effects on your account, your credit score will likely decrease if the balance exceeding the limit is reported to the credit bureaus. Rod Griffin, director of public education for the consumer credit reporting agency Experian, said, “Generally speaking, if someone goes over their limit, it negatively impacts a score. The fact that you’ve gone over your limit, regardless of how you’ve gone over it, is considered negative. ”

How to identify a problem with the use of credit

To check your credit usage, take your account balance, divide it by your credit limit, then multiply the result by 100. Additionally, some services will calculate your credit usage rate and advise you to reduce your credit usage. credit if it is higher than it should be. If you regularly check your credit score, a drop can signal that the amounts you owe on your credit cards are reaching their limits.

But if you don’t monitor your credit, you might not realize you have a problem until your credit card is turned down or you are turned down for credit. James Philpot, director of the financial planning program at Missouri State University, says there could be more subtle signs as well. For example, you might find yourself delaying opening your credit card bills because you don’t want to see the balance, or delaying major expenses, like a dentist visit, to pay off credit card balances. important credit. “If you’re missing out on other things so you can pay your credit card, that’s a problem.”

How to reduce your use of credit

You can always ask your credit card company to increase your credit limit, but if you’re approved, you might be tempted to spend even more than you do now. Ideally, if you want to reduce your credit usage, find ways to limit your spending so that you can pay off your balances.

Even if you pay off your card every month, you may run into problems if your balances exceed 30% of your limit. If so, consider paying off your credit card balance to a reasonable usage rate before your credit card company reports your balance to the credit bureaus.

Another option is to consolidate revolving debt with a loan, such as a personal loan. According to Arkali, the FICO scores examine the revolving account’s credit usage separately from the installment loan usage. Consolidating debt into an installment loan can help improve the use of your revolving credit and can lower the interest rate you pay on debt.

But even if you’re approved for a loan, Philpot says it’s still important to establish budget discipline. If you’re having trouble managing your debt and budget, consider working with a nonprofit credit counseling agency to determine your options.

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