Does Going Over Your Limit and Declining Credit Hurt Your Score?
Credit cards can be valuable financial tools that make it easier to purchase big-ticket items over time, build good credit and stave off financial emergencies when used wisely. Credit cards can also negatively impact your finances by contributing to debt accumulation or hurting your credit score if your payment history is shaky. Other elements related to credit card use can also hurt your score, including going over your balance limit and declining credit availability.
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Credit Scores
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Lenders, landlords and potential employers look at credit scores to evaluate the risk in involved in doing business with you. High credit scores lead to preferred interest rates, and low credit scores can make it difficult to land an apartment, score a new job or apply for credit card accounts. Factors contributing to good credit scores include low debt balances compared with income, a strong payment history, longstanding relationships with lenders and a diverse credit portfolio. Factors that can hurt your score include missed payments, having accounts turned over to collection agencies, filing for bankruptcy or opening numerous credit accounts within a short period of time.
Over Limit
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Credit card companies set balance limits on your credit card account to limit their own financial risk. Consumers with low credit may have low balance limits, for example. Going over your limit means charging more to your account than your limit permits, including interest and fees associated with the card. Your credit card company may charge you a fee and increase the interest rate for exceeding the balance limit, and your credit score could be negatively impacted. If this happens one time and you respond by quickly paying down the balance to well below your limit, your credit score may not drop at all, according to Experian.com. But frequently exceeding your balance limits will reduce your credit score over time.
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Credit Availability
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Even if you don't go over the limit, your credit could still be hurt by declining credit availability. The ratio of your debt balance compared with available credit is known as your credit utilization rate. Keeping your debt to within 10 percent of your available credit is recommended; staying within 30 percent of available credit will help you avoid declining credit scores. This is true even when you pay off your balance in full each month, since the balance may be reported to the credit bureaus during a time of the month when you're carrying high debt loans, resulting in lower credit availability.
Tips
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Stop using credit cards that are nearing the balance limit. Make regular payments (larger than the minimum amount required) until the balance is within recommended boundaries. You can call credit card companies to request that your balance limit be raised in order to increase your credit availability, but this can backfire if you're tempted to increase spending.
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References
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