You’ve heard it again and again: Credit card debt is bad. But if carrying a balance is your only sin, it might not hurt your score as much as you think. Play by the rules, and you’ll be able to preserve your good credit and qualify for a good credit credit card even with some debt.
Here’s how it works:
Lenders consider you less of a risk if you borrow well below your credit limit. That’s why credit utilization, or the percentage of your credit limit you use, accounts for 30% of your FICO score and is used to determine creditworthiness. If you want to keep a good credit score, FICO advises using less than 30% of your credit limit. Carrying a balance on your cards can make this more challenging, but not impossible.
Suppose you have a $1,000 balance on a card with a $2,000 limit and a $100 balance on a card with a $1,800 limit. Your credit utilization would be at about 29% – not too shabby. Pay the minimums on those cards, and you could maintain your good credit score.
When carrying a balance can hurt you
Your good credit score can take a dive as you accumulate more debt you can’t repay. Suppose you go out to eat with your family and charge $200 to one of your cards, adding to the $1,100 you already owe. A few days later, you need to cover $1,200 in emergency car repairs – and you use plastic. The next weekend, you swipe your card again for $300 to get your kids new clothes for school, bringing your total debt to $2,800. Suddenly, your credit card utilization jumps to about 74%, and you look a lot riskier to potential lenders.
To avoid going over 30% of your limit, try making multiple payments per pay cycle. Call your issuer and find out when they report your balance to credit bureaus. Their reporting often doesn’t coincide with your bill’s due date. Chipping away at your balance before it makes it to your credit report will make it easier to get a good credit credit card later on.
Once you pay off a card, keep the account open and use the card for small purchases. If you close it, your credit utilization could go up, which could hurt your good credit.
The long-term goal
It’s OK to lean on credit during hard times, but don’t make it a habit. As soon as you’re on solid financial ground, make an effort to pay off your credit card debt as soon as possible to avoid costly interest payments. Maintaining a good credit score with credit card debt is difficult, but once that debt is gone, keeping your good credit score will be a breeze.
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