Many people believe in spending more and more on their credit cards in order to build a good credit history. But, doing this without having a good knowledge of factors affecting credit score may impact your credit profile badly. It is true that credit cards should be used regularly and you can even make your everyday spends using your credit card. But, an important thing that you need to understand here is how much should you spend on your credit card so that you don’t get a negative impact on your credit score. To build a good credit score, you need to make sure that you are neither using your credit card too much nor too less. using your credit cards regularly is important, but spending less on your credit card could also improve your credit score sometimes. To understand this in detail, continue reading the article:
What Do You Mean By Credit Utilization Ratio?
The Credit Utilization Ratio is the ratio of your total credit limit to the total outstanding balance on your credit accounts. Here, the total credit limit refers to the combined credit limit of all your credit cards, loans, and other types of credit accounts. The Credit Utilization ratio of an individual plays a huge role in determining his/her credit score. 30% of your credit score depends on how you maintain your credit utilization ratio.
In order to maintain a good credit score, it is advised not to use more than 30% of your total credit limit. It may impact your credit score badly even if you are making your credit card bill payments on time. For example, if you have multiple credit cards with a combined credit limit of Rs. 10 lakhs and you have already spent Rs. 3 lakhs on one of these cards, you should avoid making any further purchases with any of your credit cards for that particular statement cycle. It is because even if you have a 100% credit limit remaining on one of your credit cards, you have already utilized 30% of your total/combined credit limit, and spending more than this would not be good for your credit score.
How Spending Less On Your Credit Card May Help You?
Spending Less on your credit card will help you maintain a good credit utilization ratio, which further helps you improve your credit score. Especially when you have a low credit limit, you need to keep your credit utilization ratio in mind before making any large purchases. For example, if you are having only one credit card with a credit limit of Rs. 1 lakh, you should try not to spend more than Rs. 30,000 on it. Once you build your credit score, your card issuers will increase your credit limit by themselves, and then it will become easier for you to make big purchases with the convenience of credit cards. However, if you already have an excellent credit score and you are holding multiple credit cards with all of them having high credit limits, you do not need to worry much as even 30% of your credit limit would most probably be sufficient enough for you.
Key Points to Keep in Mind
The following are some of the important points that credit card users should keep in mind:
- First of all, you must understand that spending less on your credit card doesn’t mean that you should not use your credit card at all. It is also one of the biggest mistakes that credit card users make sometimes. If you leave your credit cards unused for a long time, your card issuer may even close your account which will impact your credit utilization ratio as your total credit limit will decrease.
- You should try not to close any of your credit accounts even if you don’t use them much. It is because your total available credit may decrease, which may further impact your credit utilization.
- To get a good credit limit, you should not just maintain a good credit utilization ratio, but also keep other factors in mind. Make your credit card bill payments on time, don’t apply for credit cards too frequently, and use your card responsibly.
You might have understood how spending less on your credit card may help you improve your credit score. It doesn’t mean that you should use your credit card only in emergency situations, but you just need to keep a few things in mind while using it. Credit Cards may help you save a lot on your spend, provided that you are responsible enough to get the maximum benefit out of a credit card. So, you should try to build your credit score first as once you build it, your credit limit will automatically be increased by your card issuer. If you have any further doubts regarding the information provided above, you can freely ask us in the comment section below!