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Once
solely restricted to the wealthy, now almost any
one can obtain a
credit card
including the most favored, first year college
students. It's no wonder then that U.S. consumer
credit card debt stood at over $735 billion in
2003 which further breaks down to approximately
$12,000 per household for those who elected to
carry balances from month to month. While the
advertisements of the Visas and MasterCards
of the world continue to tout the convenience and
ease at which you can shop or handle an emergency
with just a swipe of the plastic, they fail to
mention how you as a consumer should use your card
including guidelines as to how much credit limit
is too much and how to keep from ruining your
credit rating
by constantly maxing out your credit card. The
purpose of this article is to provide you with
some insight in these two areas.
When
you apply for a credit card, one of the first
things you consider is the credit limit. Why?
Because that determines how much you can spend,
and the rule of thumb is the higher the limit the
better. But wait a minute, just because your limit
is $3,000 doesn't mean that you should keep
spending until it's gone. Why? There are two
simple reasons why you should not spend until your
card has reached the limit. The first reason being
that the higher your outstanding balance the
higher your minimum monthly payment. Once your
card reaches the limit unless you start to pay a
significantly higher monthly payment to get it
down, the interest charges and over-the-limit fees
will begin to kick in which will cause someone who
is living beyond their means to become overwhelmed
very quickly. Even worse if you have more than one
card that is at the limit, you are playing a
dangerous game because any major disruption in
employment or income that you can't supplement
with personal savings or credit insurance will
negatively affect your
credit score
instantly. Secondly, future creditors also
consider your debt to income ratio when deciding
whether to extend additional credit to you.
Ideally you want this to be as low as possible
considering you never know when you might need
additional credit. A debt to income ratio of 36%
or less is most favorable.
So
what is the ideal balance for someone with a
credit limit of $3,000? Ideally, potential
creditors only like to see 25% of your total
available credit outstanding at any given time.
So, with a $3,000 limit you should only carry a
balance of approximately $750. I'm not saying you
can't purchase more than $750 worth of items at
any one time, what I am saying is that if you must
make major purchases you should commit to paying
significant amounts of money each month to bring
your balance back down to this more reasonable
level before charging again.
Credit cards, when used wisely, can be one of the
most efficient and empowering tools in your
wallet. They give you the opportunity to take
advantage of deals and discounts at the drop of a
dime whether you have the money or not. Not over
looking all of these wonderful advantages, we
should really think about how we use these plastic
jewels keeping in mind that it never looks
favorable to future creditors to view a
credit report
of an individual whose accounts are at or near
max. In fact 25% of the approved credit limit is
generally the rule of thumb for the outstanding
balance that you carry forward from month to
month. By keeping this in mind as you go about
your day-to-day purchases, you can ensure that you
do not negatively impact your credit score or
prevent your self from being able to obtain new
credit.
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