If you’ve never missed a credit card payment, have never been denied credit, aren’t constantly looking for a new credit card, and have never had your credit card declined, you may presume that your average credit card debt, and how you manage your credit, is in good shape. But, there’s a common misconception about what actually makes a credit score high or low, that many people don’t realize. Here are are a few signs that your credit card debt may be climbing towards the danger zone, and lowering your credit score.
You never pay off your credit card. If you carry a credit card balance, even on low interest credit card, you know it’s costing you money. If you’re someone who charges all of your purchases in order to earn credit card rewards, and then pays the balance indicated on your statement each month to avoid paying interest, you probably imagine you’re doing everything right, and have stellar credit. The problem with that strategy? Though you’re avoiding credit card interest rate charges, you never actually pay off your credit card–at least in the eyes of the credit bureau, and lenders. Worse yet, that balance you’ve racked up eats into your debt utilization ratio, and could be harming your credit score. To indicate a $0 balance that gets reported to the bureau, you actually have to pay the balance in full by the statement close date–not the due date.
You’ve never calculated how much of your income goes to your monthly debt. Debt to income ratio is a key component of your credit worthiness, and for housing, it shouldn’t exceed 36 percent. For non-housing related debt, which includes your student loans, car loans, and minimum payments due on credit cards, it shouldn’t exceed 20 percent. Though that number may sound fairly liberal, it’s not hard to reach. A person who makes $50,000 a year, for example, would be over the “threshold,” by carrying a $400 car payment, a $300 student loan payment, and a $200 monthly credit card payment. (To figure your own percentage, add you monthly debt, minus housing, and multiply it by 12 to arrive at an annual debt cost. Then, take your salary, multiplied by .20. If the first number is higher than the second, or even close to it, you’re monthly debt is too high.
You think a high credit limit is a license to charge. Debt utilization ratio is a key component (30%) of your credit score, and it doesn’t take much credit use to push you into the danger zone. Though experts generally recommend using no more than 30% of your available credit, ideally, a person would only use 7 percent of that available credit. For a person with a credit card limit of $10,000, that means you’d never charge more than $700.
