Just a few hundred dollars of credit card debt can kill your credit score if you have a low limit. The credit scoring agencies look at your debt to credit ratio when calculating your risk. You might be able to drastically cut this important ratio without paying a single cent toward your balance.
Identification
Most financial experts refer to the debt to available credit ratio as "credit utilization" or "debt utilization." Calculate your credit utilization ratio by taking all of your outstanding credit card debt, dividing it by the total of your credit limits and and multiplying by100. The higher your credit utilization ratio, the more risky you are, because you come closer to going over your limit and it looks like you have insufficient funds to cover purchases.
What Should it Be?
Everyone has a unique credit file, so nobody can tell you the perfect credit utilization ratio to optimize your credit score. Also, the credit scoring formula from FICO is a secret. We only know for sure that you should not max out a limit. Maxing out a card takes 10 to 45 points off your score, according to Bankrate.
Misconception
Never using a credit card does not improve your score by dropping your credit utilization rate to zero -- it may lower your score. Credit cards without activity become dormant accounts, because the lender has nothing to report. If you have debt on other cards, an inactive card lowers your available credit and thus your credit utilization ratio.
Tip
Ask your lender for a higher credit limit if you cannot avoid the temptation to add more credit card debt to your profile. This lowers your overall limit when you cannot pay down your balance. Ask the lender if they must perform a hard inquiry to grant you a higher limit. A hard pull damages your score.
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