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Are you using too much of your available credit?

On Behalf of | Feb 26, 2022 | Bankruptcy Law |

Even if you have received a pay raise in the past year, you may not be able to afford the items you use every day. After all, according to reporting from ABC News, inflation has caused the price of many consumer goods to reach a 40-year high.

Using your credit cards may be a temporary solution, but you must be careful. That is, spending too much of your available credit is likely to have a negative effect on your credit score. This may lead to higher interest rates or even future denials of credit requests.

Understanding the two 30% thresholds

The major credit bureaus in the U.S. are notoriously secretive about the formulas they use to calculate credit scores. Nevertheless, all credit bureaus say they consider the credit utilization ratios of borrowers. In fact, you can expect your credit utilization ratio to account for about 30% of your total credit score.

Your credit utilization ratio is simply the amount of credit you are currently using compared to how much credit you have available. To keep a healthy credit score, you probably want to maintain a credit utilization ratio at or below 30%.

Closing zero-balance credit cards

To keep from using too much of your available credit, it may be tempting to close your zero-balance credit cards. Doing so, though, may be harmful to your credit score. Specifically, when you close your credit cards, you reduce your available credit. This is likely to increase your credit utilization ratio, which may force your credit score to plummet.

Ultimately, if your credit card debt is wreaking havoc on your credit score, it may be time to explore debt-relief options, such as bankruptcy or home refinancing.