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When you apply for a credit card, one of the first things you consider is the credit limit. Why? Because that determines how much you can spend, and the rule of thumb is the higher the limit the better. But wait a minute, just because your limit is $3,000 doesnt mean that you should keep spending until its gone. Why? There are two simple reasons why you should not spend until your card has reached the limit. The first reason being that the higher your outstanding balance the higher your minimum monthly payment. Once your card reaches the limit unless you start to pay a significantly higher monthly payment to get it down, the interest charges and over-the-limit fees will begin to kick in which will cause someone who is living beyond their means to become overwhelmed very quickly. Even worse if you have more than one card that is at the limit, you are playing a dangerous game because any major disruption in employment or income that you cant supplement with personal savings or credit insurance will negatively affect your credit score instantly. Secondly, future creditors also consider your debt to income ratio when deciding whether to extend additional credit to you. Ideally you want this to be as low as possible considering you never know when you might need additional credit. A debt to income ratio of 36% or less is most favorable. So what is the ideal balance for someone with a credit limit of $3,000? Ideally, potential creditors only like to see 25% of your total available credit outstanding at any given time. So, with a $3,000 limit you should only carry a balance of approximately $750. Im not saying you cant purchase more than $750 worth of items at any one time, what I am saying is that if you must make major purchases you should commit to paying significant amounts of money each month to bring your balance back down to this more reasonable level before charging again. Credit cards, when used wisely, can be one of the most efficient and empowering tools in your wallet. They give you the opportunity to take advantage of deals and discounts at the drop of a dime whether you have the money or not. Not over looking all of these wonderful advantages, we should really think about how we use these plastic jewels keeping in mind that it never looks favorable to future creditors to view a credit report of an individual whose accounts are at or near max. In fact 25% of the approved credit limit is generally the rule of thumb for the outstanding balance that you carry forward from month to month. By keeping this in mind as you go about your day-to-day purchases, you can ensure that you do not negatively impact your credit score or prevent your self from being able to obtain new credit. |
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