Are you supposed to use all the money on your credit card?

The Credit Card Myth: Should You Spend Every Last Penny?

The allure of a credit card can be strong. It represents readily available spending power, a safety net, and perhaps even a gateway to rewards. However, understanding how to properly use a credit card is crucial for building and maintaining a healthy credit score. One persistent myth is that you need to spend all, or even most, of your credit limit to demonstrate responsible usage. This is unequivocally false.

In fact, the opposite is true. You are absolutely not supposed to use all the money on your credit card. Spending close to your credit limit can significantly damage your credit score, even if you faithfully pay it off each month. The culprit? A key factor in credit scoring called credit utilization ratio.

Your credit utilization ratio is the amount of credit you’re currently using divided by your total available credit. For example, if you have a credit card with a $5,000 limit and you’re carrying a balance of $2,500, your credit utilization ratio is 50%. Credit bureaus generally consider a low credit utilization ratio to be anything below 30%, with the ideal range often cited as below 10%.

Why does this ratio matter so much? A high credit utilization ratio signals to lenders that you might be struggling to manage your finances and that you’re heavily reliant on credit. It raises red flags about your ability to repay future debts, making you appear a riskier borrower. On the other hand, a low utilization ratio demonstrates responsible credit management and financial discipline.

Here’s why keeping your credit card balances low is so important:

• Boosts Your Credit Score: A low utilization ratio is a major positive indicator in your credit report. It shows lenders you’re not over-leveraged and are likely to pay back your debts.
• Increases Approval Chances: When you apply for new credit, such as a mortgage, car loan, or even a new credit card with better terms, lenders will scrutinize your credit score and report. A healthy credit score, supported by responsible credit card usage, significantly improves your chances of approval.
• Secures Better Interest Rates: A strong credit score can translate to lower interest rates on loans, saving you significant money over the life of the loan.
• Provides Financial Flexibility: By not maxing out your credit card, you retain access to a safety net for emergencies. You don’t want to find yourself in a situation where you desperately need credit, but your card is already maxed out.

The responsible approach to credit cards involves:

• Spending only what you can afford to pay back in full each month. This avoids interest charges and keeps your credit utilization ratio low.
• Treating your credit card as a convenient payment method, not free money.
• Monitoring your credit card statements regularly for fraudulent activity.
• Setting up automatic payments to ensure you never miss a due date.
• Aiming to keep your credit utilization ratio below 30%, ideally below 10%.

In conclusion, the idea that you need to spend a significant portion of your credit limit to build good credit is a harmful myth. Responsible credit card usage is about strategic and disciplined spending, with a focus on maintaining a low credit utilization ratio and paying your balances in full each month. By adopting these practices, you can leverage the benefits of credit cards while simultaneously building a strong credit profile.