Tip: This is something that could drastically harm your credit score.
Credit card can be handy, but there’s a reason they tend to get a bad rap. Credit cards can easily lead to overspending, and once that happens, debt becomes an inevitable consequence. But misusing credit cards can also drop your credit score, and when that happens, it can become extremely difficult to get approved for a loan, rent an apartment, and in some cases even. find a job.
Sadly, a TD Bank poll released earlier this year finds millennials in danger of hurt their credit scores, and all because they only do one thing: ignore the use of their credit.
An estimated 50% of millennials use between 31% and 90% of their credit limit, reports TD Bank. This is above, or well above, the recommended rate of 30% or less. If you’re guilty of doing the same, it’s worth fixing the problem before you find yourself in a position where your bad credit will come back to bite you.
One Email a Day Could Save You Thousands
Expert tips and tricks delivered straight to your inbox that could help save you thousands of dollars. Register now for free access to our Personal Finance Boot Camp.
By submitting your email address, you consent to our sending you money advice as well as products and services which we believe may be of interest to you. You can unsubscribe anytime. Please read our Confidentiality declaration and terms and conditions.
Credit Usage and Your Credit Score
Credit usage is how much of your available credit you use at one time, and it’s one of the five factors that go into it calculate a credit score. It is also the second most important factor that is incorporated into this number.
A credit usage of 30% or less will improve your credit score, while a usage rate of 31% or more will lower it. This means that if your total credit limit is $ 10,000, you should never owe more than $ 3,000 at a time. Remember, lenders want to see that you are using your credit responsibly, and racking up too much debt at once is a sign that you are doing the opposite. And the more debt you accumulate, the less likely you are to repay it.
Keep in mind that it is possible to have a fairly high credit card balance but maintain low usage. If you owe $ 5,000 on your credit cards, but have a credit limit of $ 20,000, that’s 25% usage, which is still good.
Overcome high credit utilization
If your credit usage is over 30%, there are several steps you can take to avoid a massive impact on your credit score. On the one hand, you can pay off some of your existing debt. However, there is a good chance that this will only be an option if you receive a sum of money, such as a job performance bonus or a tax refund.
Assuming it’s not on the table, another option is to try increasing your credit limit, which you can do by contacting your credit card companies and asking them. If your accounts are in good standing – that is, you’ve made all of your minimum monthly payments on time – there’s a good chance you’ll be able to borrow more, and once you’ve reached your credit limit. will increase, your usage will decrease.
In this sense, you can also try applying for a new credit card to increase your total credit limit. But be aware that every time you do this, it triggers a serious investigation into your credit report, which makes it it hurts your score a bit short term.
Keep your expenses under control
Limiting the extent to which you accumulate credit card balances can help keep your usage in favorable territory. It can also help you avoid paying interest charges that occur when you hold different balances for a long time. Therefore, settle on a budget so you can see how much you can afford to charge on your credit cards and look for a second job if you’re constantly charging essentials as opposed to frivolous shopping.
Finally, stop shopping with credit cards if you can’t trust yourself to charge responsibly. Letting your credit usage get out of hand can hurt your finances in more ways than one, so this is a scenario best avoided at all costs.