Most of us try to live within our means. The fact is, nobody likes having credit card debt looming over their heads. However, sometimes unexpected things do happen. Whether it was a family emergency, a reduction of hours at work, or something else entirely, many of us have had the unpleasant experience of having to charge essentials to their credit card with the knowledge that they didn’t have the resources to pay it off immediately.
While charging little things here and there occasionally can actually help your credit score, maxing out your credit card can be one of the worst things you could do to it. Also known as your “utilization rate,” maxing out your credit card — and not paying it off right away — can deal a lethal blow to your credit score.
Keep Your Utilization Rate Low
Sometimes it’s a good idea to pay for something with your credit card. After all, reward points won’t accumulate themselves, right? Making a major purchase on your credit card can actually be considered a smart decision – but only if you plan on paying it off immediately. As a general rule of thumb, it’s advised to not let your revolving balance exceed 30 percent. In layman’s terms, if you have a credit card with a $1,000 limit, don’t let your revolving balance (the amount owed at the end of each period) go over $300.
Exceeding the Limits
If you do go over 30 percent, what’s the worst that can happen? If you have a low interest rate, you can just pay it off next month, can’t you? That could be a very dangerous decision. Once you start to accumulate a revolving balance on your card, you may detect serious hits to your credit score. If your balance creeps above 50 percent, you’ll start to notice a dip in your credit score. If it encroaches on 80 percent? Watch out; you’re looking at a severe plummet. If you completely max out your credit card and fail to pay it off right away? Your credit score can plunge a whopping 150 points.
What Can You Do?
Seeing a major drop in your credit score can be terrifying. Fortunately, it’s not all gloom and doom. Once you start to pay back that debt, you can start to see the numbers rise again. If you completely pay your credit card off, it’ll be almost like the revolving debt never happened in the first place! The credit bureaus are almost like very tolerant goldfish in this regard: once the debt is paid off, they don’t hold a grudge.
Of course, most people don’t have just one credit card with a nominal sum built up on it. On average, each American has 2.35 credit cards and over $5,000 worth of debt. If you’re struggling with credit card debt and would like to take the first steps in improving your credit score, I can help you. Please reach out to me today for your free consultation!