Credit and debt are two very different concepts that can affect your life. You can have too much debt, but it’s hard to make the argument, of having too much credit, unless you’re a risky spender or have a tendency to impulse buy. Holding on to a comfortable credit limit can be a good thing, but really how much is ‘comfortable’, and do you really have enough to take advantage of these three benefits?
Keeping An Emergency Fund
In the event of an emergency, where you don’t have the money to pay for your everyday expenses, a credit card can come in handy until you get back on your feet. You should always make sure that you have at least 6-months of living expenses available on credit–just in case. That means that if you spend $3,000 a month on groceries, rent, and utilities, you should have the equivalent of $18,000 available, just in case.
That doesn’t mean that you should forego savings altogether. Remember to set aside a certain percentage from every paycheck so that you can supplement this credit if something were to ever happen. That way you won’t find yourself struggling to save yourself from debt if the situation lasts longer than you initially expected.
Maintaining Low Utilization Rates
When you increase your credit limit and the balance stays the same, the amount of credit utilization on the account will decrease. Since the credit utilization has a 15% impact on your overall credit score, your score is bound to increase. The higher your credit lines are, the lower your utilization will be, and the more purchases you can make without worrying.
Analyze your monthly purchases and make sure that your purchases never exceed 20% of your total credit lines. If you have a major purchase to make sometime during the month that is going to take up a large portion of your credit limit, just make sure that you pay off a majority of the total cost before the bill comes around. You don’t have to pay off the full balance of the purchase, but do your best to pay down the total cost, so that equates to 20% or less. When purchases start to exceed this amount, you should request a credit limit increase.
Appearing Responsible To Big Lenders
Holding on to a bunch of accounts with high credit scores that you either pay off every month, or maintain low balances, makes you look good to creditors. When you go to apply for a mortgage, auto loan, or any major financial purchase, they’re going to look at these credit lines and see that you can appropriately handle larger sums of money without getting out of control. After making this conclusion based on your record, you’ll be more likely to get the money you need at some of the best rates they offer.