Many factors impact your spending habits. Just how much of your outlays are on your credit cards impacts your credit rating.
Psychologists have found forces that govern our behaviors and cause us to make decisions that are not necessarily rational or in our best interest. Spending may cheer you up because it produces a temporary feeling of elation or because ownership brings with it social status.
An advertisement that associates an item with happiness can cause you to buy online or in a store. Out of habit, you may stop every day at a coffee store on the way into work or go out for lunch several times a week.
Of course, there’s impulse spending for that “must-have” item that gives you instant gratification. You may also get a feeling of satisfaction from getting a bargain price, even if you don’t need the item. And you may feel that by handing someone a nice gift they will return the favor with affection.
Any and all of these may behaviors lead you to splurge so much that you dive into deep debt. And when all that spending is financed through credit cards, your credit score can suffer.
Research shows that people spend more when they use a credit card instead of cash or a debit card. Why? Credit allows you to fulfill an immediate need without having to pay right away. When you tap or swipe plastic or enter a credit card number online, your bank balance remains the same.
While you should use a credit card from time to time, spending more will not improve your score. Stay under 30% of your credit limit, and the lower you stay below that, the better. Reason: The ratio of the card balance to the credit limit, known as credit utilization, is the second-most watched number at credit bureaus such as Experian.
The most important, of course, is payment history. Credit bureaus mark off for late payments. When you overextend yourself, you are less likely to make even minimum payments on time.
How can you keep your credit card balances in check?
- Pay down the higher balances first so that you get back under the 30% figure across the board.
- When you know that you will be crossing the ratio threshold in a given month, make an early payment to lower your card balance.
- Under certain circumstances, ask for a higher credit limit. That will lower your ratio. There’s a risk, of course, that you will feel freer to spend more. Proceed with care.
- Keep open a credit card that you rarely use. It may seem odd, but credit companies apply the 30% ratio to the sum of your credit limits. If you are at 40% utilization on one card and 0% on your only other card, the ratio across the two cards is a reasonable 20%.
For more information on how to keep your credit score healthy, visit Tropical Financial’s “Get Beyond Money” section. There, you will find helpful articles, a podcast and other resources.