What happens if you use over 90% of the credit limit on a credit card?

Impact of Credit Card Utilization on Credit Score

Credit utilization, which refers to the ratio of outstanding balance to available credit, plays a significant role in determining an individual’s credit score. Exceeding 90% of the credit limit on a credit card can have severe consequences for one’s credit score.

Negative Impact of High Utilization

When an individual’s credit utilization exceeds 90%, it signals to credit bureaus that they are overextending their credit and potentially struggling to manage their finances. This can result in a substantial decrease in the credit score, potentially by 50 points or more. A low credit score can make it challenging to qualify for loans, credit cards, and favorable interest rates.

Positive Impact of Low Utilization

Conversely, maintaining a credit utilization ratio below 30% is considered beneficial for a credit score. It demonstrates to credit bureaus that the individual has ample available credit and is using it responsibly. Over time, this can result in a significant increase in the credit score, approximately 90 points or more. A high credit score enhances an individual’s financial reputation and offers access to better credit terms.

Credit Utilization Best Practices

To maintain a healthy credit score, individuals should strive to keep their credit utilization below 30%. Here are some best practices:

• Pay down balances regularly to reduce the outstanding amount.
• Use multiple credit cards to distribute the balances and lower the overall utilization.
• Avoid using cash advances, as they are typically treated as balance transfers and can increase utilization.
• Monitor credit utilization regularly and make adjustments as needed.

Conclusion

Credit utilization is a crucial factor that affects credit scores. Exceeding 90% of the credit limit can severely damage a credit score, while maintaining a balance below 30% can significantly improve it. By practicing responsible credit usage and monitoring utilization, individuals can build a strong credit history and enjoy the benefits that come with it.