The concept of heavy credit card debt is open to varying interpretations. People who have greater access to money can typically afford to carry more total debt than people living from paycheck to paycheck. Your financial goals and your income usually dictate whether you are carrying too much credit card debt.
What is certain is that your level of credit card debt does significantly impact your credit score. Most critically, your FICO score factors in your credit usage as 30 percent of your credit score, which is used by lenders to assess your creditworthiness. Your debt-to-credit limit ratio is the key attribute of credit usage. This is the percentage of your credit limit on each card and overall that is in use. For instance, a balance of $4,000 on a card with an $8,000 limit has a 50 percent debt-to-credit limit, or credit utilization, ratio.
The Low End
John Ulzheimer, president of consumer education at SmartCredit.com, promotes an aggressive approach to minimizing debt usage. He suggests that as close to a zero balance as possible is the ideal and that utilization ratios below 10 percent are necessary if you want to be among the elite creditworthy borrowers. In a February 2011 article "What’s the Best Credit Card Debt Percentage?" Ulzheimer noted that borrowers with credit scores at or above 760 have average utilization ratios of 7 percent. In essence, your chances of maintaining an excellent credit score increase if you have a very low credit card debt.
Many financial experts recommend that you keep your credit card usage below a 30 percent ratio, or at most 50 percent. Elizabeth Ody, associate editor of Kiplinger's Personal Finance, promotes the 30 percent ratio limit in her article "Tame Your Credit Card Debt." She indicates that if you have card ratios above this threshold, you need to work diligently to get the balances paid down as quickly as possible. Doing so improves your credit score as well as your ability to get loans and good rates in the future.
The Danger Zone
Some people justify much higher card utilization ratios by having more modest financial goals of simply keeping up with card payments and avoiding over-limit charges. The ability to make your card payments on time is important and does relate to the payment history factor in your credit score. In a June 2012 Chicago Tribune article "The Top 5 Myths About Building Credit," writer Mike Dolen indicates that while having a significantly low utilization helps your credit score, your rating is generally considered high and likely to hurt your score at 70 percent utilization. Getting into the 90- to 100-percent range of credit utilization increases your risks of going over your limit, leading to fees and further damaging your score.
Income and Payments
Along with your credit utilization ratio, you need to keep your monthly payments down to a level you can comfortably cover with your income. Just what level that is will vary, depending on your personal situation. But, as an example, most mortgage lenders will cast a suspicious eye on your application for a home loan if your total monthly debt payments, including a mortgage, tax and insurance payment, rise above 40 percent of your gross income. Since mortgage-related payments can easily consume 25 percent or so of your income, that means you should be spending no more than about 15 percent of your income on credit card payments if you expect to own your own home.
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