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Do you know what your credit limit is or how much debt it’s reasonable to carry? Here’s how to manage your credit limit and how it affects your credit score.
You’re managing your budget. You’ve put recurring expenses on auto-payment plans to avoid late fees. And you contribute, if you can, to your emergency and retirement funds. For the next step to financial responsibility, consider managing your credit limit.
Most people don’t realize that credit limits can have a significant affect on your credit score, and vice versa. With your credit score determining loan interest rates, mortgages, even future employment prospects, effectively managing your score is crucial. Managing credit limits is the place to start.
Your credit score is determined by five key factors:
- Payment History (35%) – Do you make your payments on time?
- Available VS Outstanding Debt (30%) – Do you pay down your credit card balances to $0 every month or do you have $100 of available credit on a $5,000 credit card? To boost your credit score, 35% of your credit limit should be available.
- Longevity (15%) – The longer you keep an account open, the better your credit score.
- New Lines of Credit (10%) – Every time a lender, creditor, or employer pulls your credit, your score suffers. It’s short term, but a recently opened credit account could negatively affect a subsequent application for a higher credit limit.
- Diversity (10%) – The more types of credit you manage, the more responsible you look.
It’s important to know the pros and cons of asking for higher credit limits. The primary advantage is a better credit score. Since your available credit should be in the 30% to 40% range, boost your score by requesting a higher limit.
The drawback to having a higher credit limit, obviously, is that you tend to spend more. The more you spend, the larger your account balance. If you don’t increase your monthly payment, the larger balance will result in larger percentages of your monthly payment going toward interest rather than principle.
If you’re looking for small, manageable solutions for a temporary financial crisis, contact us.