A credit card can be helpful, but it all depends on how you use it. And specifically, how much you spend on it. One of the most common reasons people get into trouble with their credit cards is because they overspend. If you're going to use credit cards, knowing how much you can spend safely is a must.
What's the most you should spend on your credit card?
The most you should spend on your credit card is what you can comfortably pay back without interest charges. You won't be charged interest if you pay off your card's full statement balance by the due date.
Credit cards offer a grace period between when you make purchases and when your payment is due, so you don't need to make a payment right away to avoid interest. Even so, it's safest to only make purchases you could pay back in full immediately, if needed. Some people use credit cards to spend money they don't have at the moment, but will have by the time their payment is due.
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This isn't a good habit to get into. Any issue, such as an unexpected bill, could leave you without the money you were planning to use to pay your credit card. If you can't pay off your card's balance, then you'll start incurring interest charges on your credit card debt.
So, if you have a $2,000 balance on your credit card, you should have that much money set aside for your credit card payment in your bank account. That way, you'll have no problem paying the bill on time.
You have more flexibility with a 0% intro APR credit card
Most credit cards have very high interest rates. The average credit card interest rate recently hit a record high of 22%. That makes carrying any balance an expensive proposition.
The exception is with 0% intro APR credit cards. This type of credit card has a 0% APR on purchases for an introductory period. Depending on the card, the intro period could last 12 months, 15 months, or longer. The card's standard APR applies after the intro period, so it's best to pay off what you owe by the time it ends.
If you have a 0% intro APR card, you should still only spend what you can pay back without interest charges. The difference is that you'll have a lot longer to pay back purchases without being charged interest. Instead of needing to pay off the balance by the next due date to avoid interest, you'll only need to pay it off by the end of the intro period.
Let's say you're planning to make a $3,000 purchase, and you can pay $500 per month toward your credit card. That'd be expensive to carry on a credit card with an average APR of 22%. But on a card with a 0% intro APR for 12 months, you'd have more than enough time to pay it off with no interest.
What's the most you should spend for a high credit score?
If you want to build credit or maintain a high credit score, don't spend more than 30% of your card's credit limit. If your card has a $10,000 credit limit, keep the balance at or under $3,000.
The reason for this rule is your credit utilization ratio. That's the ratio between your credit card balances and credit limits. A lower credit utilization is better for your credit score. The rule of thumb is not to go above 30% credit utilization.
Your credit utilization is updated every month. It's not necessary to have it as low as possible at all times. If your credit utilization spikes one month because you need to make some large purchases, but you get them paid off without any interest charges, it's not a big deal.
It is important to have low credit utilization any time you have a credit check coming up. For example, if you're planning to apply for a mortgage soon, get your credit utilization as low as possible first. It will help your credit score, which could get you a lower rate. But if you don't have anything like that on the horizon, there's no need to worry if your credit utilization goes up temporarily.
Everyone's safe spending limit on a credit card is different based on their financial situation. If you only charge what you can comfortably pay back, you won't have any problems.
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