by Kailey Hagen | Updated July 21, 2021 - First published on July 8, 2019
Many or all of the products here are from our partners that pay us a commission. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation. Terms may apply to offers listed on this page.
You can get a huge amount of credit -- but should you? Here's what you need to know.
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.
Tips and tricks from the experts delivered straight to your inbox that could help you save thousands of dollars. Sign up now for free access to our Personal Finance Boot Camp.
By submitting your email address, you consent to us sending you money tips along with products and services that we think might interest you. You can unsubscribe at any time. Please read our Privacy Statement and Terms & Conditions.
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.
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:
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.
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.
If you have credit card debt, transferring it to this top balance transfer card secures you a 0% intro APR into 2023! Plus, you’ll pay no annual fee. Those are just a few reasons why our experts rate this card as a top pick to help get control of your debt. Read The Ascent's full review for free and apply in just 2 minutes.
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.
Copyright © 2018 - 2021 The Ascent. All rights reserved.