Can you settle an argument I have with a colleague? He says that having a credit card with a high limit and not using it is bad for your credit score. For instance, using $1,000 out of $15,000 every month is bad since it leaves space to spend irresponsibly so using just $1,000 out of a $4,000 would be better. I, on the other hand, think it’s better if you don’t go over 30-35% of the credit limit.
It sounds like your colleague’s argument basically boils down to the idea that it’s better to actually be irresponsible with your money than have the potential to be irresponsible with your money. This is, as you suspected, not the case.
It is true that the ratio between the balance on your credit card and its limit does play a factor in determining your credit score. Ideally you want to have a high total limit while maintaining a low balance. In other words, having a card with $1,000 on it and a $15,000 limit is good. Using $1,000 on a card with a limit of just $4,000 would be bad.
You don’t need to take my word for it though, this is what Wells Fargo has to say about determining your credit score. I’ve marked the relevant part in bold:
How much you owe on loans and credit cards makes up 30% of your score. This is based on the entire amount you owe, the number and types of accounts you have, and the proportion of money owed compared to how much credit you have available. High balances and maxed-out credit cards will lower your credit score, but smaller balances can raise it – if you pay on time. New loans with little payment history may drop your score temporarily, but loans that are closer to being paid off can increase it because they show a successful payment history.
Forbes agrees with this and goes into more detail:
A recent credit score survey by the Consumer Federation of America and VantageScore Solutions revealed a troubling statistic. A little over one-third of survey participants didn’t know that maintaining a low credit card balance was good for their credit score. If you have credit cards, keeping a low balance-to-limit ratio (a.k.a. credit utilization ratio) might help you earn and keep a better credit score. Credit utilization is largely responsible for 30% of your FICO Score.
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