How Much of My Credit Limit Should I Use?

Your credit limit tells you exactly how much money your credit card issuer will let you use without paying a penalty. You can use as much of your limit as you want — but that doesn’t mean you should max out your card. Here’s a look at what you should know about your credit limit.

What Happens When You Use Your Full Credit Limit?

Maxing out your credit cards can cause your credit score to take a hit, even if you pay your balances on time. Amounts owed is the second most important category used to calculate your FICO credit score, accounting for 30 percent of your score. Your credit utilization ratio, the amount of credit you use compared with your credit limit, is an important measure of this. So, if you have a $900 limit on one credit card and spend $450 during one billing cycle, your credit utilization ratio on that card would be 50 percent.

[Read: Best Credit Cards for Fair Credit.]

You should pay attention to your credit utilization on each individual account and across all your credit cards. “The FICO score itself can look at credit utilization on a single account, but it could also look at credit utilization on the aggregate across several credit cards,” says Can Arkali, principal scientist of analytics and scores development at FICO.

While there are no hard-and-fast rules around what an ideal utilization ratio should be, below 30 percent is typically recommended. On the other end of the spectrum, having a zero percent credit utilization ratio isn’t ideal, either. “Consumers with a really low utilization ratio tend to be slightly better credit risk individuals relative to those who come in with zero percent as their credit utilization,” says Arkali.

FICO research has shown that FICO score high achievers only use 7 percent of their credit lines, on average, Arkali says. So if at the end of the month, you owe $400 on a credit card with a $5,000 limit and $1,000 on a card that has a $15,000 limit, your total credit utilization is 7 percent.

You don’t have to carry a balance on your credit cards to maintain a healthy credit utilization ratio. The FICO score only considers the balance your lender reports to the credit bureaus. Typically, that’s your statement balance from your latest monthly statement, Arkali says.

What If You Spend More Than Your Credit Limit?

If you find yourself facing a major emergency but don’t have enough credit to cover the expenses, you might be able to exceed your credit limit. Your credit card company may allow you to go over your credit limit, though you may have to specifically opt in. In that case, you could face an over-limit fee and a penalty APR, depending on the terms of your credit card agreement.

[Read: Best No-Annual-Fee Credit Cards.]

In addition to the negative effects to your account, your credit score will likely drop if the over-limit balance is reported to the credit bureaus. Rod Griffin, director of public education for consumer credit reporting agency Experian, says, “Generally speaking, if someone goes over their limit, it has a negative impact on a score. The fact that you’ve exceeded your limit, regardless of how much you’ve exceeded it by, is considered negative.”

How to Identify a Credit Utilization Problem

To check your credit utilization, take your account balance, divide it by your credit limit and then multiply the result by 100. Also, some services will calculate your credit utilization ratio and advise you to reduce your credit use if it’s higher than it should be. If you’re regularly checking your credit score, a drop can signal that the amounts you owe on your credit cards are reaching their limits.

But if you’re not monitoring your credit, you may not realize you have a problem until your credit card is declined or you’re denied for a credit application. James Philpot, director of the financial planning program at Missouri State University, says there also might be more subtle signs. For example, you might find yourself putting off opening your credit card bills because you don’t want to see the balance, or delaying important expenditures, such as visiting the dentist, to pay large credit card balances. “If you’re letting other things slide so you can pay off your credit card, that’s a problem.”

How to Lower Your Credit Utilization

You can always ask your credit card company to increase your credit limit, but if you’re approved, you might be tempted to spend even more than you do now. Ideally, if you want to lower your credit utilization, find ways to limit your spending so that you can pay down your balances.

[Read: Credit Cards with High Credit Limits.]

Even if you’re paying off your card each month, you can run into trouble if your balances are more than 30 percent of your limit. If that’s the case, consider paying your credit card balance down to a reasonable utilization ratio before your credit card company reports your balance to the credit bureaus.

Another option is consolidating revolving debt with a loan, such as a personal loan. According to Arkali, FICO scores look at revolving account credit utilization separate from installment loan utilization. Consolidating debt into an installment loan can help improve your revolving credit utilization and may lower the interest rate you pay on the debt.

But even if you get approved for a loan, Philpot says it’s still important to put budget discipline in place. If you’re having trouble managing debt and budgeting, consider working with a nonprofit credit counseling agency to figure out your options.

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