Financial Tips | Debt Management

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2/3/09

How Much Credit is Too Much?

Credit is an important financial tool to possess. Having good credit can help you get loans and can save you money by way of lower interest payments. Therefore, should you need to obtain a loan for investment purposes, having good credit will help you get that loan. Additionally, the investment that you pursue could help you make money and thus, the loan that you took effectively made you money. However, all of this is possible only if you have a good credit. Therefore, it is in your best interest to obtain and maintain good credit.

There are certain things that factor into your credit score. One such factor is your credit to debt ratio. The higher your credit to debt ratio, the better that it is for your credit score. In other words, if you have a lot of available credit and a little bit of debt, lenders look at this favorably. Ideally, you should have no more than 30% of each credit card's credit limit in use. Additionally, your total debt should be at most 30% of your overall credit. For example, if your total available credit is $50,000, you should have no more than $15,000 in total debt.

Having a lot of credit is good as long as you make sure that you follow certain guidelines in obtaining such credit. Such guidelines include not acquiring the credit too quickly and not to use it as soon as you get it.

Acquiring credit too quickly is looked upon with disfavor in the credit reporting bureaus. This is a fact because the bureaus believe that when a person acquires a lot of credit quickly, they are set to incur a lot of debt. As such, your ability to repay such debt, if acquired, may be impaired. Obviously, is you cannot pay your debt, this will negatively affect your credit score.

In accord with the above paragraph, should you incur a substantial amount of debt immediately after you obtain your credit, your credit score will be decreased. This is bad because the whole point of obtaining more credit is to increase your credit score.

It is important to know that even though having a high credit to debt ratio can increase your credit score, you should not have too much credit because you may be tempted to use it. Having a high credit limit can be abused should you start to utilize it wastefully. Therefore, if you are tempted by credit cards, you probably should not have too high of a credit limit.

Maintain a high credit to debt ratio, never have more than 30% of your total credit in use, and do not acquire debt too quickly or else your credit score will suffer.

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