Your perfect credit limit depends on your circumstances. Sometimes you might want a lower limit to help you manage your own spending urges. In other cases, raising your credit limit can make you look (and feel) like a high roller — as long as you don’t actually spend more than you can pay back. So, how do you use your credit limit responsibly?
KNOW YOUR CREDIT UTILIZATION RATIO
Your credit limit is part of a bigger picture called your credit utilization ratio. It might sound scary, but it’s pretty simple: How much credit do you have available and how much are you using?
Gather all of your credit card accounts (get out your statements or, if you want an extra gold star, pull your credit report). Look only at revolving debt accounts, like credit cards, where the balance rolls over each billing cycle, and you decide how much to pay. This is different from installment debt, like your car loan, where you pay the same amount each month.
- Step 1: Add up your credit limits. This is your total amount of credit available. Let’s say you have two cards and each one has a $1,000 limit. Your total is $2,000.
- Step 2: Add up your balances. This is the total amount of credit you are using. Let’s say you have a $500 balance on each card, for a total of $1,000.
- Step 3: Divide the total amount you’re using by the total credit you have available. Dividing $1,000 by $2,000 gives you 0.5. Make it a percent by moving the decimal two spots to the right. So, 0.05 = 50%.
Your credit utilization ratio is 50%, which means you’re using half of your available credit. Ideally, you want to keep your ratio as low as possible, but not zero.
So, if you have $2,000 available, and you are using 10% ($200) you are doing fantastic.
If you’re using 25% ($500) you’re still looking good.
It’s only when you get above 30% ($600) that most experts say you’re headed for trouble.
Why not zero? Because creditors want to see how you’re using credit. If you’re not using it, there’s nothing to see. If you’re using 25% ($500) you’re still looking good.