How Much Credit Is Enough to Meet Your Needs?

by Kailey Hagen | July 8, 2019

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You can get a huge amount of credit -- but should you? Here's what you need to know.

Man with credit card and cell phone

Image source: Getty Images

Credit has to be used responsibly -- or else it can hurt your ability to secure new loans. It could even affect your employment and housing prospects. One of the keys to using credit properly is understanding how much credit you should have.

Here are a few factors to think about when making that decision.

Everyone should have at least some credit

If you never take out a loan or open a credit card, you probably won't have a credit history. This may not seem like an issue, but it can make financing a large purchase, like a home, difficult. Unless you can cover the full expense in cash, you'll need a loan. With no credit history, few lenders will be willing to work with you.

Lenders use your credit history to assess your financial responsibility and the likelihood of getting their money back. If you don't have a credit history, they're in the dark about how you'll manage that money. They'll probably turn you down just to be safe.

By using credit responsibly and making payments on time, you can establish a strong credit history that will get you approved for the loans you want. Good credit also gives you access to the best interest rates.

How much credit do you actually need?

There's no magic number as far as how much credit you should have. The closest thing is your credit utilization ratio. This measures how much credit you use each month versus how much you have available. If you have a credit card with a $10,000 limit and you charge about $2,000 to this card every month, your credit utilization ratio would be 20%.

Lenders like to see a ratio of 30% or less, and the lower the better (as long as it's above zero). A high credit utilization ratio indicates a heavy reliance on credit and suggests you may be living beyond your means.

You can use this as a baseline to determine how much credit you should have. Here's how to do that:

  1. Add up the credit limits on each of your credit cards.
  2. Add up the approximate average balance of your credit cards each month.
  3. Divide this by the total credit limit you calculated earlier.
  4. Multiply the result by 100 to determine your credit utilization ratio.

If it's above 30%, there are two ways to lower it. You can reduce how much you charge to your credit cards each month or you can increase the amount of credit available to you.

To increase your available credit, apply for new credit cards or increase the limit on your existing cards. You can do this by reaching out to your credit card issuer and requesting a credit limit increase. The card issuer may ask for updated income information to help it make its decision.

Whether applying for a new card or increasing the limit on an existing one, the card issuer will do a hard credit check, which will lower your credit score by a few points. This isn't an issue if you're approved, because your new, lower credit utilization ratio should more than make up for this.

If you're unlikely to be approved, you're better off not applying for a new credit card or credit limit increase. Reduce how much you charge to your credit cards instead.

Never charge more to your credit cards than you can pay back each month

All of the above information assumes that you trust yourself to manage your credit responsibly. If you're tempted to spend more than you have, you're better off avoiding new credit cards or credit limit increases. You could wind up drowning in credit card debt.

Some credit cards have interest rates over 30%. This makes them difficult to pay off once you're in debt because your balance rises rapidly. You should never charge more to your cards than you can pay back at the end of the month so you can avoid interest charges.

If you're already in credit card debt, take steps to pay down that debt as quickly as possible. Reduce your discretionary spending and consider transferring your balance to a card with a 0% introductory APR to help you pay down your debt faster. Limit how much you charge to your credit cards until your debt is paid off so you don't make the problem worse.

Credit can be a good or a bad thing depending on how you use it. If you haven't already, figure out your credit utilization ratio and take steps to lower it if you can. It'll help your credit score, and it may help you save money on future loans and score the best credit card offers, too.

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