- The higher your credit score, the more borrowing options you might have.
- Managing your credit card spending wisely could be your ticket to a more favorable credit score.
It may require a little math on your part.
Having strong credit isn't just a matter of pride (though there's certainly nothing wrong with patting yourself on the back for maintaining a solid credit score). The higher your credit score, the easier it becomes to qualify for a loan or credit card. And if you're taking out a big loan, like a mortgage, solid credit could save you hundreds of dollars each year (or more) on interest.
But some people start out with great credit only to see their scores take a hit over time. If that's a situation you'd rather avoid, here's one important move it pays to make.
Keep tabs on your credit card balances
There are different factors that are taken into account to calculate your credit score. The factor that carries the most weight is your payment history -- the extent to which you're timely with bills. But the factor that carries the second most weight is your credit utilization ratio, which measures the amount of available credit you're using at once.
If you manage to keep your credit utilization ratio under 30%, you'll generally manage to prevent a credit score drop (at least a drop based on credit card usage). But once that ratio exceeds 30%, your credit score could take a serious hit, so it's important to keep that threshold in mind.
So, let's say you have a spending limit of $10,000 across three different credit cards. If you keep your total balance to $3,000, you should be in decent shape as far as your credit score goes. But a $3,500 balance could cause more of a hit to your score, so that's a scenario you'd want to avoid.
Now, if you already have a lot of credit card debt, to the point where your credit utilization ratio is well above 30%, then the sooner you pay it off, the sooner you can help your credit score improve. But paying off existing debt isn't the only thing you can do to lower your credit utilization ratio. You can also get a lift in your spending limit.
Going back to our example, let's say you're able to raise your spending limit across your various credit cards from $10,000 to $12,000. Suddenly, an outstanding balance of $3,500 puts you below 30% utilization.
You might think that getting a boost in your spending limit would be difficult. But the reality is that if you're current on your minimum payments, your credit card company might be more than happy to extend your line of credit -- especially if that encourages you to rack up a higher balance that it can then collect interest on.
Of course, that leads to an important warning -- if you get a spending limit increase in an effort to lower your credit utilization ratio, don't charge more expenses until your existing balance is whittled down. Otherwise you'll just make it harder on yourself to get that ratio back into favorable territory.
Be mindful of your spending
As a general rule, it's best to not carry a balance at all on your credit cards, but, rather, to pay your bills in full each month. Doing so is an easy way to avoid losing money to interest.
But if you're eager to preserve your credit score, look at your credit card balances every week to make sure they're not getting too high. Checking in frequently could prompt you to cut back on spending temporarily -- and avoid a hit to your credit score that ends up hurting you.
Alert: highest cash back card we've seen now has 0% intro APR until 2025
If you're using the wrong credit or debit card, it could be costing you serious money. Our experts love this top pick, which features a 0% intro APR for 15 months, an insane cash back rate of up to 5%, and all somehow for no annual fee.
In fact, this card is so good that our experts even use it personally. Click here to read our full review for free and apply in just 2 minutes.
Our Research Expert
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 - 2023 The Ascent. All rights reserved.