Imagine your credit card as a big box that you can fill with water. The total capacity of the box is your credit limit, and the amount of water you’ve poured into the box represents your spending. For instance, if your box can hold $10,000 worth of water and you’ve filled it with $2,500, you’ve used 25% of your credit. This percentage is what we call your credit-card utilization ratio.
Now, why should you keep an eye on how much water you’re pouring into your box? The more water in your box (the higher your utilization ratio), the riskier you appear to lenders. They might worry that you’re using too much credit and might struggle to pay it back. Most financial experts suggest you should only fill your box 30% of the way. But we have seen that’s way too high and recommend playing it even safer and only filling it 10%.
If you have several credit cards, it’s like having multiple water boxes. You need to be careful not to overfill any single box, and you also need to watch the total amount of water in all your boxes combined.
We’ve noticed that people who filled their boxes to just 15% ended up seeing their credit scores drop by 30-50 points! A drop like this can make it more challenging to get loans and might lead to higher interest rates.
So, be a cautious water pourer. Keep the water level in your box low by paying your credit card bills on time, spending wisely, and not overfilling any single box. Balancing this can be tricky, but your credit score will definitely thank you!