The main purpose of the credit card is to borrow money from a bank or a financial institute in case you NEED it. The credit limit is the maximum amount of cash you can use via your credit card in a particular billing cycle. But does it mean you should use the limit fully or is there another side of the story?
Implications Of Maxing Out The Credit Limit:
Although you may use the whole credit limit without any imposition of a fine or any charges, it is never recommended to do so. Keep in mind that a credit card means you are borrowing money from someone.
Therefore, if you reach the credit limit, that will negatively impact your FICO credit score and hence lower the trust your lender has in you.
The experts at FICO suggests that the credit utilization ratio should be around 30%. This means you should use 30% of the credit limit ideally if you don’t want a dent in your credit score.
The credit utilization ratio counts for as much as 30% for deciding your monthly credit score. Therefore, you must keep an eye on the credit utilization and if you follow the experts’ advice, you’ll know that most of the high credit score achievers have only a 7% credit utilization ratio. But on the other hand if you are looking to apply one of the best credit cards then doubleyourline is the way to go.
How To Calculate The Credit Utilization Ratio:
It’s quite simple to figure out the credit utilization ratio. All you need to do is add the amounts which you have used on all of your credit cards and divide it by the sum of credit limits of all your cards. Lastly, multiply the result with 100 to get the credit utilization ratio.
Let me take you through an example using numbers so you can easily relate to it. For example, you have 3 credit cards and have used $40, $90, and $70 respectively on each credit card. So the sum would be $200.
Furthermore, suppose the credit limit of these cards is $300, $250, and $250 respectively, making the sum equal to $800. So, dividing $200 by $800 and multiplying the result with 100 will land you at 25%. This means you have utilized 25% of your credit limit.
Going Over The Line:
Though utilizing the credit limit fully can damage your credit score, going over it can have an additional negative effect. Going over means your expenditures have grown out of your limit and possibly you won’t be able to repay the loan on time.
The over-usage will impose an additional fee in form of APR that depends on the terms and conditions of your credit card. This means now you don’t just have to pay back the borrowed amount but also an interest in it.
After all that, your credit score is going to receive a huge blow that will take you months to recover.
Can You Lower The Credit Utilization?
Yes, you can! You know two factors are making up the credit utilization ratio, the used credit, and the credit limit. You can lower the credit utilization ratio in two ways.
By lowering the used credit, that is by managing your expenses and limiting them to an acceptable level, and secondly by requesting your bank to increase your credit limit.
The second way is possible is you have a good credit score and have met any unfortunate event where you require a large amount of credit. As i mention one of the best credit card doubleyourline above similarly one of the best payment gateways is Securitas epay.
Simply keep your credit utilization ratio under 30% if you want to positively affect your credit score, however, 7% is an ideal number.
Keep in mind that credit utilization is calculating considering all your credit cards combined, so don’t worry if you have used one credit card a little more than the others.