How much you should spend on a credit card
Usually, people use less than 30% of their available credit. In general, it is considered a golden rule, but using less than 30% is not an established rule by companies or financial gurus.
When a person uses less of the available credit, it is best for his or her credit scores. On the other hand, using a large amount of the available credit will lead to difficulty repaying the debt.
Therefore, it is essential to keep the scores low, which improves the credit report and keep it in good shape. Many factors determine the right utilization rate for your available credit.
For example, these are the status of your credit report, the number of accounts, and the overall financial health. Next, we will discuss the credit utilization ratio. Continue reading!
Credit Utilization Ratio
It refers to the association between the revolving account's available credit limit and the balance you carry on other accounts. In simple words, you have a credit card with a $2,000 limit, and it had a $1,000 balance when the information of your account was sent to credit bureaus like Equifax. In such a situation, your ratio is 50 percent because you have used half of the available credit.
Remember, when you pay off your credit balance in full, you can still have a higher utilization rate that could be sent to the other major bureaus, which are Equifax, Experian, and TransUnion.
It is because the credit-issuing company report the balance to the major bureaus at the end of the statement period and not after your repayment. If you are frequently using your credit cards and want to keep the utilization ratio low, you will have to pay down the balance before the end of the statement period.
Doing so will help you decrease the balance, which is eventually reported to the bureaus. Keep in mind that you can have multiple credit utilization ratio or rate, which can affect your credit score on each of your accounts. The results will be shown on your credit reports.
The right amount of credit
Use as little of your credit as possible to avoid hurting your credit score as much as possible. Financial experts recommend to people that their utilization rate should be less than 30%, but it is not a shortcut to achieve a better credit score.
Depending on the status of your credit account, you may take advantage of keeping a low rate across the board, and not in total. It is crucial to negotiate with your credit company to increase your credit limit, but at the same time, you should ensure using a lower amount of credit score.
When you have an increased credit limit, and you use it reasonably, your interest rates will come down significantly. Thus, it will improve your credit score and your chances of getting approved for a mortgage or car loan.
In general, we don’t recommend using credit cards and advise people to pay in cash for their purchases. However, if you want to use these cards, make sure the utilization rate is no more than 30%.
|Thomas Moore is a proud American with a Bachelors Degree in Business Administration from the University of San Diego. He has been in the financial industry for many years holding numerous licenses in multiple states. He currently helps operate cashkingco.com and is our resident expert on all things finance and a great writer. Thomas is also an avid outdoor enthusiast that loves fly fishing streams in the Western United States. LinkedIn Profile|