A few days ago, a single mom friend of mine came to me with a problem: Her credit score kept going down even though she was paying her bills on time.
I took a closer look at her situation and diagnosed the problem quickly: Her credit utilization – meaning the amount of her credit that she was using – was very high. [Here’s a great article about the ins and outs of credit utilization: https://www.wellwallet.com/credit-utilization/.]
And since so many single moms rely on credit cards to cover expenses every month, it’s a really common problem. When you use all of your available credit, it puts the credit rating agencies on edge. It’s a key component of your credit score, and it counts as much – sometimes even more – than late payments.
So even if you are never late with a payment…even if you pay off your credit cards in full every month…high credit card spending can crash your credit score.
No matter what your credit limit is, using more than about 30% of it will put a dent in your credit score. And the closer you get to your limit, the more your score suffers.
That can affect your wealth potential in some very important ways. For example, a lower credit score means higher interest rates when you do borrow money or use credit cards. Paying more interest means less money for you to stash in savings or investment accounts.
Bottom line: Pay attention to your credit utilization – and keep it under 30% – to protect your credit score.