What is the ideal credit card balance to credit card limit ratio?

A big question that many consumers have when it comes to credit cards is whether or not they should carry a balance on their credit cards in order to build up their credit ranking. Does carrying a balance help you or hurt you when you are looking to add points to your FICO credit score? What ratio of credit card limit to credit card balance is ideal for building credit? The truth is that you can build your credit faster if you have the right ratio when it comes to carrying a balance when compared to your available credit.

Building Credit Points by Carrying a Balance

There are a number of factors that go into figuring your particular, individual credit score. Your credit card balance is one of them. Your credit score also reflects everything from being late on one payment to defaulting on a loan, to bankruptcy discharge. If you make timely credit card and other debt payments on the balance, instead of paying the entire balance off at once, it can really add a lot of points to your score. This is particularly true if you are rebuilding your credit because your score is low, or if you have no credit. In this way, running a balance on your credit card yet making payments each month, on time, can help you to offset your existing credit history and build a stronger credit ranking. A word of caution: don’t apply for credit cards at random if you have bad credit. Each time an inquiry is made into your credit, it takes points away from your credit score. Be certain about the card that you want before you apply, and if you’re turned down, consider a secured credit card instead. A secured credit card is a credit card that you secure with a monetary deposit equal to the amount of credit that you wish to have extended to you. Most secured credit cards report to the major credit bureaus, and many of them reward you with an unsecured (regular) credit card after you have used the card and paid on it successfully for a period of a year or less.

Using Your Credit Card to Build Credit

Regardless of whether you have a secured or unsecured credit card, you can use it to build credit. Once you have the credit card in place that you want to use for credit building purposes, it’s time to start using it in a way that will add the most points. It is a good idea to make small purchases with your credit card that you would normally make in cash, and then pay them off when you get your credit card bill each month. This can add many points to your credit score over time.

Credit Card Limit to Balance Ratio

Another method is to use your credit card up to a maximum of one-half of the credit card limit, and then pay the balance down to one-third of your available credit limit when each month. Why is this method so effective in adding points to your credit card? Because you use up one-half of your available credit, you show the credit card issuer that you can manage credit – since you could have spent more but did not. By paying it down to one-third of the available credit and running a balance, it shows that you can abide by the terms of the card by making monthly payments. After all, if you pay off the balance in full, you will not be building points because there will be nothing to pay!

Updated: January, 12 2012