Since I have been traveling abroad, it’s hard for me to sometimes recognize the home country I left behind. And since the pandemic began, recognizing the home I know from afar has been harder than ever. Millions of Americans were struggling to get by financially before the pandemic, but now Americans are struggling with credit card debt. So, what percent of your credit limit utilization should you use?
Your credit limit utilization should always ideally be 30%. But even that percentage is just a general rule. (More on that later.)
So, before we talk about credit limit utilization rates, let’s talk more about how American credit has gone out of control.
After all, the best way to maintain your credit limit is to plan ahead, budget, appreciate getting what you need in life, and appreciate that things can always be worse.
Credit Card Debt After the Pandemic
To better appreciate why you should understand the dynamics of your credit limit utilization rate, let’s discuss the current state of debt in America.
The personal debt crisis was bad before the pandemic but has become cataclysmically worse afterward.
The coronavirus pandemic wrecked local and global economies alike in its continuing wake. In 2020, the terms “essential” and “non-essential” workers became a part of the American lexicon.
And that is because tens of millions of Americans became forcibly unemployed in 2020. Some industry experts believe that the true unemployment rate in 2020 might have been as high as 45%.
That means as many as 70 million Americans may have been forcibly unemployed in 2020. Such unemployment rates would have been comparable with Great Depression era economics.
There are now a historically high number of available job vacancies, but they are mostly low and medium-salary retail and service sector jobs.
The unprecedented disruption to American life and financial autonomy has caused about 4 million Americans to quit their jobs every month for seven consecutive months in 2021.
The point is that the pandemic caused created financial flux and uncertainty on a macro and microeconomic level. And that means that personal budgets and finances are being involuntarily disrupted.
And that means more debt for the average American.
Self-Perpetuating Debt
The average American now owes over $5,500 in credit card debts. And long before the advent of the pandemic, the average American owed over $90,500 in total debts.
Unfortunately, one reliable source of income for Americans is self-perpetuating debt via credit cards.
And during the pandemic over 42% of Americans started increasingly depending on their credit cards even more to pay bills. Worse, over 54% of Americans always carry credit card debt balances from one month to the next.
What that means is that once you become mired in credit card debt, it becomes increasingly harder to get out of it. Depending on credit cards to pay bills also creates self-perpetuating debt cycles.
And those debts can add up since the average annual interest rate is 16% at the minimum.
If you are depending on credit cards to get through these times, then you wouldn’t be alone. However, you should always be mindful to keep a budget.
Prioritize need over want.
And always pay attention to your credit limit utilization rate.
What is Credit Limit Utilization?
Your credit limit utilization is the amount of money you owe on your credit card relative to how much money is available on your credit limit.
So, imagine that you have a credit card with a $1,000 credit limit. If you owe $300 on your outstanding balance, then you have a 30% credit limit utilization rate.
If you have multiple credit cards, then you must use a formula to properly calculate your credit limit utilization on all cards.
Start by adding up the balances on all of your credit cards. Then add the credit limits of each credit card. Then divide the balance by the credit limit. And then multiply by 100 and you will calculate your credit limit utilization rate on multiple credit cards.
The credit limit utilization rate limit of 30% is more of a generalized guideline than a strict rule. You can use as much of your credit limit as you like.
However, the 30% rule is a maximum limit when it comes to the calculation of your FICO score.
FICO scores range between 350 and 800. Your FICO score determines your creditworthiness for credit card applications, certain jobs, car loans, and so on.
35% of your FICO score is determined via your timely credit payment history.
Another 30% is determined by your credit limit utilization.
15% is determined by your overall credit history.
Your mix of credit determines 10% of your FICO score.
And the number of your credit inquires determines 10% of your credit score.
The higher your credit limit utilization, then the more negatively impacted your FICO credit score will be.
And if your credit utilization is high on multiple credit cards then the impact on your FICO will be worse.
Pay Your Bills on Time
Pay your bills on time and in full, don’t just pay the minimum amount. Paying the minimum amount will leave you open to interest fees charges and just deepen your debt.
Make a budget and differentiate between your needs and wants.
You could get a credit card that allows you to transfer balances onto other cards so you can pay down debt easier.
And try to stay under 30% when it comes to credit limit utilization.
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Allen Francis was an academic advisor, librarian, and college adjunct for many years with no money, no financial literacy, and no responsibility when he had money. To him, the phrase “personal finance,” contains the power that anyone has to grow their own wealth. Allen is an advocate of best personal financial practices including focusing on your needs instead of your wants, asking for help when you need it, saving and investing in your own small business.