With Credit, Like Drinking, It’s Best Not to Break the Seal

Many of our members distinctly remember the first time they carried a credit card balance. Some felt trepidation, some titillation.  For most it was the start of a downward spiral, a spiral that takes many months to present itself as a serious problem.  It doesn’t seem like a big deal at first – you’ll get to it next month or the month after that.  But, that seemingly manageable debt has a way of quickly getting out in front of you.

Overspending is easy when you have several lines of credit, all with sky-high limits, unless you are a particularly careful consumer. During the housing boom of the early 2000s, banks doubled and tripled credit limits and issued cards like free candy to kids because Americans’ home equity soared. Unfortunately, as we all know, this time of plenty didn’t last forever.

Credit card issuers are using stricter standards now, although loosening gradually.  Many banks have cut credit limits with little warning, and this can really hurt your credit score.  You see, the formula that determines your credit score likes to see that you have a lot of available credit, but use relatively little of it.  Yes, it’s counterintuitive.  Try to keep your credit card utilization rate (that is, the percent of available credit you use) below 30% (actually 20%, if possible).  If a bank lowers your limit and you continue to spend at your regular rate, your utilization rate rises. This, in turn, lowers your credit score. Be aware!

Some people have sworn off credit cards entirely after the recent financial mess.  At Community Ladders, we tend to disagree with this strategy for most of our members.

What do you think? Leave your comments below.

References:
USA Today, How rising home values, easy credit put your finances at risk
CreditCards.com, Lower credit limits can hurt consumers’ credit scores