That is an excellent question. If you intend to pay off 100% of the balance every month, the answer is actually that it doesn’t matter! If, however, you are not sure you’ll be able to pay it off in full, more factors come into play. Let’s break it down!
What is Credit Utilization?
I wrote a very detailed article on the subject here, but simply put, credit utilization is the portion of your total credit limit that you spend. In this case, amount spent / $1,000.
This is the first factor that will be impacted when using too much of your credit limit
**Contrary to popular belief, it does not benefit your credit score to carry a balance.**
While every, “credit guru” will likely give you different numbers, keeping your credit utilization under 30% ($300 balance with a $1,000 credit limit) would be considered good. Under 10% ($100 balance with a $1,000 credit limit) would be considered great.
My personal favorite? Just keep that thing at 0% and treat your credit card like a debit card. Only spend money if you have it.
Credit utilization is one of the most important factors in determining your credit score. It is extremely important that you fully understand it!
Is My Credit Score Really That Important?
Don’t always believe what Dave Ramsey tells you. The vast majority of people will need credit at some point in their life. The most common instance is when applying for a mortgage to buy a house.
The better your credit score is when you apply for a mortgage (or any loan, really), the better interest rate you will get.
A better interest rate means less total money paid, and more money in your pocket.
By that logic, a better credit score literally saves you money.
Want to learn some other ways to understand and improve your credit score? I have written multiple articles on the subject, check out my credit hacks!
What if I want to spend more than $1,000?
There are many situations where one might need access to more than $1,000. While common minds would likely say, “Just write a check” or, “Use your debit card”, a true financial wizard would understand that credit cards have significant perks that can greatly benefit them!
Let’s just say, for example, that you are ready to propose and you have a $5,000 engagement ring purchase in mind.
Don’t get mad, this is just an example and that is a round number.
Provided you have done all the right things and saved enough to buy this in full, you should just write a check, right?
If you did a little planning in advance, you could get yourself a credit card with 1%-2% cash back and save yourself between $50-$100 on that ring!
All you have to do is pay the card off in full and you’ve effectively saved yourself a significant amount of money!
Gradually increasing your credit limit and obtaining new cards (which, in turn, increase your credit limit) can allow you to obtain rewards for some of life’s large purchases.
If you are considering some different cards to apply for, I wrote this card review on 5 of the cards I use the most!
You don’t have to worry about any of this if you just pay your balance off in full every month.
I will say that it does appear to be a good thing to at least have some somewhat regular activity on a credit card, but the idea that you have to carry a balance to improve your score is purely a myth.
Treat your credit card like a debit card. If you get to a point where you aren’t using a certain card, throw something like your monthly Spotify payment on it to keep it active. Just be sure that it gets paid off in full every month!
You’ll be in great shape!
Thank you so much for taking the time to read this article! I hope you enjoyed it and learned a thing or two!
Please do not hesitate to contact me with any suggestions, comments or questions!