The Art of Striking a Perfect Balance

The Art of Striking a Perfect Balance

Before, only the wealthy could get credit cards; now, even the most popular freshmen in college may get one. As a result, it's not surprising that in 2003, Americans owed more than $735 billion on their credit cards, or about $12,000 per household if they chose to carry a balance from month to month. 

While advertisements for Visas and MasterCards continue to tout the ease with which you can make purchases or deal with emergencies with just a swipe of the plastic, they fail to mention how you, as a consumer, should use your card, including guidelines as to how much of a credit limit is too much and how to avoid damaging your credit rating by constantly maxing it out. This article's goal is to enlighten you in these two areas.

One crucial aspect of each credit card application is the available credit. Why? For the simple reason that it is this number that sets your spending cap, and as a general rule, the higher it is, the better. But hold on, just because you have a $3000 cap on your spending doesn't mean you should blow through it. Why? There are two easy arguments against continuing to use a credit card once it has been maxed out. The first is that the amount of your minimum monthly payment increases as your balance increases. 

A person who is living beyond their means will quickly become overwhelmed once their credit card balance exceeds the limit and interest charges and over-the-limit fees begin to accrue until they begin making a much greater monthly payment to get it down. If you have multiple cards that are close to or at their maximum limits, you are taking a huge risk by doing so, since your credit score will immediately take a hit if you lose your job or income and are unable to make up the difference through other means, such as savings or credit insurance. 

Second, your debt-to-income ratio is a factor for potential lenders to evaluate when considering whether or not to grant you a loan. Because you never know when you might need extra credit, you want this to be as low as feasible. The ideal debt-to-income ratio is 36% or lower.

If a person has a $3,000 credit limit, what should their optimal balance be? Prospective lenders prefer that you use no more than 25% of your total available credit at any given moment. If your maximum is $3,000, then you should not have more than a $750 balance. I'm not saying you can't buy more than $750 worth of stuff at once; I'm saying that if you do, you should pay off your balance in full every month until it's below $750 before charging anything else.

When utilized properly, a credit card may be a highly effective and empowering financial tool. Whether or not you have the cash on hand, you may take advantage of offers and discounts at the drop of a hat with their help. 

Despite all of their usefulness, we should exercise caution in our use of plastic gems by keeping in mind that a person whose accounts are at or near their limits will never attract the attention of prospective lenders. In fact, the rule of thumb for the outstanding sum that you carry forward from month to month is typically 25% of the permitted credit limit. If you keep this in mind as you go about your daily shopping, you can avoid hurting your credit and limiting your access to fresh credit.

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