Balancing Your Credit Lines Available vs. How Much You Use
You may be wondering how much of your credit lines available you should be using? You don’t want to use too much and damage your credit. However, you want to use enough that it contributes to improving your credit score. This can be confusing, especially with all of the rumors going around. This post will help you navigate the world of credit utilization. We’ll talk about how much you should be using, and how much you should leave. We’ll also give you tips to stay on track with your credit utilization.
What Happens if You Have a Lot of Unused Credit Lines Available?
Having many credit lines available with a zero balance or low credit card use might seem like a good idea. However, a lender may look at this and deny you if you apply for more. To a lender, a significant amount of unused credit seems like a risk. If you choose to spend it all at once, you may not be able to repay it. Your possible lack of credit history may lead to them rejecting your credit application. If you have a credit card you’ve never used your bank may close your credit card account. This will lower your amount of available credit. In turn, a lender may be less willing to work with you.
What Happens if You Use a Lot of Credit?
On the other end of the spectrum is using a lot of credit. If you have credit cards and you’re close to maxing out your credit, this looks bad. A lender will look at this and may think you’re stretched financially thin and have trouble with credit card debt. This can also make them hesitant to open any more lines of credit for you. If they think you’re using credit cards to get by, they’ll worry about getting on-time payments. You won’t have to worry so much if this only happens once in a while. However, if it’s often, you may want to look at your finances and scale back. Also, don’t go over your credit limit. This could get additional fees added onto your balance.
The Secret of Credit Utilization
Simply put, credit utilization is how much of your available credit you’re using. To get your credit utilization score, divide your current balances by your current available credit. For example, if you have a $12,000 credit limit and you’re using $3,600 your credit utilization is 30%. This is an extremely important factor in your FICO credit score.
How Much Available Credit Can You Safely Use?
Now that you know what credit utilization is, you have to know how much available credit you can safely use. It is important to note that credit utilization takes the balances across all of your credit cards into consideration. So, say you have a $3,500 balance across three credit cards, and your total available credit is $8,500. Your credit utilization would still be 41%. This is true even if you’re only using 20% of one card’s available credit and 15% on the other. With that in mind, you want your goal credit utilization score to be around 9%. Don’t go any higher than 30%, or it’ll start to impact your credit score negatively over time.
Additionally, you want to pay your balances in full each month. This will show any potential lenders that you’re responsible. It’ll also show them that you’re not struggling financially. Avoid carrying card credit balances each month; this will either raise or keep your credit score high. You’ll also avoid and reduce credit card interest fees, so you’ll pay less each month.
What Happens When You go Over 30% Credit Utilization?
Once you hit the 30% and higher utilization bracket, you’ll start to see negative impacts. Your credit score might take a hit and fall a few points. Lenders will see this as you’re struggling to pay your bills and deny you any new credit. Even if you’re paying off your balances each month, you’re considered high-risk. One of the biggest issues with high credit utilization and carrying a balance each month is the interest rates. You have to remember that most credit cards have interest rates that range from 4.9% to 24.99% or higher. If you carry a balance each month, this gets added onto your total balance. Over time, this has the potential to add thousands onto your balance. This means you’ll ultimately pay more over the life of your credit card. The goal is to avoid credit card fees that waste your money.
Tips to Balance Credit Lines Available and Maintain a Healthy Credit Utilization
The key to raising your credit score with credit utilization is to keep it as low as possible. Aside from that, we’ll go over a few more tips to keep your credit utilization healthy.
Tip One: Keep Your Credit Utilization Around 9%
Although it may be tempting to keep your credit utilization at zero, this is generally not a good idea. This means you’ll have a lot of credit lines available. As we talked about earlier, lenders frown on this and may deny you another line of credit. Lenders what to see you using your credit responsibly. You can do this by keeping your credit utilization at or around 9%. If your credit utilization is higher, don’t go higher than 30%.
Tip Two: Keep Multiple Credit Lines Available and Open
Having a single credit card with a credit utilization of 50% will hurt your score. You want to spread these purchases out over a few cards and raise your overall credit limits. This will show lenders that you are responsible with your credit. It may also help to increase your credit score over time. However, you should choose your multiple credit cards responsibly. You want credit cards that line up with your lifestyle and have a low-interest rate.
Tip Three: Pay Your Bills More Than Once Every Month
Many credit card bills are due at the end of their billing period. To combat this, pay your credit card bill before the due date and twice a month. This way you won’t have to worry about forgetting your payment every billing cycle. It’ll show up as paid each month, and this can help you combat late fees. It’ll also give your credit score a boost, and add to your credit history.
Staying within the ideal credit utilization bracket can be difficult. However, with careful planning and a little work, it is possible. If you manage your credit lines available, you should stay within the boundaries and see your credit score increase.
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