Maintaining An Optimal Balance

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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