Are you going to swipe your credit card to the max this holiday shopping season?
While it is your credit card, and you can charge as much as the bank will allow, experts say maxing out your card could really hurt your credit score.
“When you increase your balances on your credit cards, it effects something we call the utilization rate, which is just a big term that means if you add up all of your balances and all of your limits and divide, you get a balance to limit ratio,” Senior Director of Public Education for Experian Rod Griffin said. “So, if you have high balances as compared to your credit limits, it’s going to hurt your credit scores.”
The reason? The more debt you have, the higher the risk that you won’t be able to repay it.
And if you think you can outfox your credit card company by applying for another card and spreading that debt around, that probably won’t help your score either.
“There are a couple of problems with that,” Griffin said. “One is credit scores look at the balances on all of your cards in total, but they also look at the balances on individual cards, so that individual balance is still going to be pulling down your credit scores.”
He continued, “The other is that when you apply for a new account and open a new account, it’s not just that you get a higher credit limit if you get approved – there are other things that are happening at the same time, it’s never just one thing – so if you apply for a new account, you have a new inquiry, that’s going to hurt your credit scores because there’s now potential new debt.”
Griffin said even if you do a good job managing this additional credit card, it would still take another three to six months for that to be reflected in your credit score.
