We often spend time and effort trying to find ways to reduce our dependence on credit cards to avoid the burden of credit card debt. Carrying balances on high interest credit cards can be one of the most difficult financial challenges to overcome, but losing access to valuable credit lines that you might need in the future can create challenges that are not easy to navigate too. In 2009, Discover cut credit lines for more than 3 million customers and they plan to reduce available credit for another 2 million customers this year.
Over the past year, most major card issuers have aggressively cut customer credit lines. Every line of credit that they cut reduces the chance of a customer using that credit and then failing to make payments. When credit lines are cut, warning has to be sent to the cardholder in writing but the card issuer is not required to provide you with any advance notice. Once a line of credit is gone, it can be difficult to replace, especially with credit card issuers continuing to worry about the economy. Here are some reasons to use your card enough to maintain your current credit line.
To Sustain a Healthy Credit Utilization Ratio: This ratio is one of the most important for lenders considering you for loans you might need in the future. By most accounts, 30% of your credit score is based on how much of your available credit you actually use. If you carry a $3000 balance on a credit card with a $9000 balance, you have a healthy credit utilization ratio of 33%. However, if that credit line gets cut to $6000, your credit utilization ratio jumps to 50% and can hurt your credit score. Spending enough to keep your credit lines intact can help to avoid a scenario like this.
To Have Access to Funds in an Emergency: The best kind of emergency fund is a risk free savings or money market account. However, for some people, their line of credit represents money that they can access at a moment’s notice if they need it and have no other options. Losing your available credit means losing access to money during a time when you really need it. And if you’re in really dire straits, such as after suffering a job loss or an accident that prevents you from working, getting a new credit line to replace the old one will be next to impossible.
To Avoid Clutter on Your Credit Report: The natural thing to do if you lose access to credit is to try to replace it, a challenge in today’s financial world. Every new loan and credit application gets recorded on your credit report and eventually, future creditors can be scared off just because of the appearance of desperation in obtaining lines of credit in the past.
As with many other financial topics, balance is important when determining the appropriate amount of spending to be charged to your credit cards. The key is to find a happy medium where you’re using your credit cards enough to keep credit lines intact and creditors happy without creating a scenario where you’re not able to make substantial payments against card balances.
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