Often people wonder how much of their available credit they should be using at any given time in order to maintain healthy credit scores. Many experts recommend that you have enough available credit (that’s the portion of your total credit limit that you have NOT used) so that you’re not using more than 30% of it at any given time. However, there’s nothing special about a 30% debt-to-credit ratio, as it’s often called. The reality is you really can’t have too much available credit.
Understanding How Available Credit Works
When you’re trying to build your credit history and improve your credit scores, it’s important to understand why your available credit matters. When most people refer to available credit, they are talking about the total amount of the credit limits you have on all of your revolving accounts. Primarily, these accounts include credit cards, charge cards and store cards.
But the absolute amount of available credit isn’t as important to your credit scores as your debt to credit ratio is. This is the total amount of available credit on your credit report, divided by the total amount of debt you have and it’s also known as your credit utilization ratio or rate.
It’s a number that many experts say should stay below 20%-30%. Another way to put this is that your total available credit should be five times the total amount of debt. So, if you’re total available credit was $1,000 and your total balance is $300, then you’re using 30% of your available credit.
What Qualifies as Debt?
When we talk about debt, we’re referring to the amount of your available credit that’s in use – even if you pay of your balance in full each month. Let’s say, for example, you have a total credit limit of $10,000 and each month your charge around $9,000, which you pay off in full each month, never carrying a balance or incurring interest charges.
You may think that because you’re paying off the balance each month, you have nothing to worry about when it comes to your credit scores. But the reality is that there’s a good chance that from the score’s perspective you’re using 90% of your available credit at any given time.
When most cardholders avoid interest charges by paying their balances in full, they don’t consider it to be debt, and they might be surprised to see that amount referred to as debt on a copy of their credit report. So even if you are paying off your balance over time, it’s still important to consider your debt to credit ratio and how it can affect your credit score.
How to Manage Your Level of Debt
Obviously, taking control of your long-term debt is vital to managing your debt to credit ratio. In addition, there are things that you can do to manage what appears as debt on your credit report. Generally, your credit card balances are reported to the major consumer credit bureaus once a month.
To reduce your statement balances, you can actually make a payment before the end of the statement cycle. You can also make multiple payments throughout the month to make sure the balance never gets too high. For example, if you know that you will be incurring a lot of expenses in a month that you will pay off in full, then you can make a payment before the end of your statement cycle, reducing your statement balance. This will reduce the amount that’s reported as debt, lowering your credit utilization ratio and increasing your credit scores.
While you might not want to do this regularly, it can be important when you are considering applying for a mortgage or another major loan. At these times, having the highest possible credit scores can be vital to increasing your chances of being approved while getting the lowest possible interest rate and the most favorable terms.
Managing Your Credit Limits
Thankfully, there are several ways that you can manage your credit limits and your debt to credit ratio. To increase your credit limits, you can do one of two things.
First, you can request a credit limit increase from your existing credit card issuers. Many card issuers will want your account to be open for at least a year before considering a request to increase your limits. The credit card issuer may also ask permission to take another look at your credit history, and ask for updated information about your employment, income and housing costs before making its decision.
The other way to increase your credit limits is to apply for a new credit card account. Once your account is opened, the new line of credit will add to your existing totals, reducing your debt to credit ratio for a given amount of debt.
Can You Have Too Much Available Credit?
From the standpoint of increasing your credit scores, you can’t have too much available credit. Having a very low credit utilization ratio, such as one that’s under 10%, can only help your credit scores.
However, there are a few other potential problems with having a large amount of available credit. Some people might be tempted to overspend and incur debt when they have very high credit limits. Also, you don’t want to apply for several new lines of credit in a short period of time. This can be seen as a sign of possible financial problems, and it can hurt your credit scores.
By understanding how available credit works, and how it can affect your credit scores, you can take the steps necessary to insure that you have the right sized credit lines for your needs.
Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer, or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.