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For the last five years I've had a baby Visa card ($500 limit) that I've paid off religiously; I haven't paid a cent of interest and I plan to keep it that way.

To build credit (and to get a cash rebate, however miniscule) I put my large expenses on it then pay it off from my chequing account within a few days. Essentially this means that if you look at one of my month's statements, you'll see more than my limit in expenses, for example $650. Since I buy and pay things off when they appear, things don't necessarily align to the monthly statement dates -- so as an example, if I pay my bills on the 6th, and the statement is on the 9th, it'll appear like a $300 balance even though it's paid by the 12th. Sometimes there's barely anything on it when it rolls over.

Last night I was reading that credit rating is negatively impacted by debt utilization ratio which means the amount of credit used to the amount that's available. That made me freak out because the way I use my card combined with my low limit puts me well above the 30% recommended limit -- I rarely come in at under 50%.

My bank is trying to throw me a $1000+ card, but I just see it as a shovel to dig myself a huge hole (and a credit application will ding my score), so I haven't accepted one.

Is this negatively impacting my credit score or does Visa expect my utilization to be off because the credit limit is so low? Should I take the larger credit card?

PS: Am I correct in understanding that utilization ratio is the amount of net unpaid usage of the card? Because if it's gross usage then I'm at least at 130% each month

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One of the goal of the higher credit score was to be offered more credit, which means that you succeed. Why would you want to turn it down? –  mhoran_psprep Jul 1 at 14:38
    
Similarly related to my issues: money.stackexchange.com/questions/30687/… –  thinly veiled question mark Jul 1 at 15:49
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Why do you care what your credit score is if you don't want more credit? The utilization ratio changes every month, and it's not a big factor in your credit score, so I would just ignore it unless you're about to take on more debt (like buying a house with a mortgage). –  Brendan Long Jul 1 at 19:52
    
You don't need a credit card. For your use debit works just the same. Stay away from credit, you'll be glad you did. Mortgage is NO problem with NO credit, BAD problem with BAD credit. –  AbraCadaver Jul 1 at 21:17

3 Answers 3

Short answer, take the credit line increase. It will help your utilization ratio, which is a significant part of your credit score. Just exercise discipline to not USE the extra credit line to get back in the same spot you are in now.

Your credit utilization is based on what is reported to the Credit agencies at the end of the month by your credit card. You can see exactly what they are reporting on your credit report, which you can get free up to three times a year at AnnualCreditReport.com as regulated by the US Government.

Whether you pay it off every month doesn't always help you keep the utilization down unless you keep the balance low on the date the credit card company reports to the credit bureaus, which can vary and is tricky to predict. Your best bet is just to not go over a certain percentage on your card at any time, or pay it down immediately when you do. It makes it easier to do this by getting your credit limits raised whenever possible, even if you don't plan to use the additional credit.

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+1 also keep in mind that the FICO score reflects both individual and aggregate balances, so keeping both individual and agggregate below 50% will help your credit score if you are concerned about maximizing your credit worthiness. –  staticx Jul 1 at 15:04

The fact they offered you a better card is no guarantee you will be accepted for it but it's certainly worth a shot. One credit application will have no discernible effect on your credit score so that's a non-issue and the additional limit will let you use your card much more effectively.

By paying off purchases a few days after making them you're not taking advantage of a major benefit of a credit card; the interest free period, which is usually around 4-5 weeks. For example:

  • 1st January - $500 purchase made
  • 31st January - Statement, $500 balance, payment due in two weeks
  • 14th February - $500 payment taken

Not certain how it works in the US but in the UK you just tell your card provider that you want to pay the balance in full every month and they set up an automatic debit from your current/chequeing account for whatever the statement amount is. No more time wasted making those payments manually and no chance of digging that hole you mentioned!

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It depends entirely on what you're trying to do in life.

If you want to build wealth, you're doing it wrong.

If you want to have a better credit score, take the larger credit limit, use it and don't pay it off immediately. Why do this? Your FICO score is based on 5 major criteria.

From the myFICO website:

  1. 35% is payment history
  2. 30% is amounts owed
  3. 15% is the length of your credit history (or how long you've been in debt)
  4. 10% is new credit
  5. 10% is the types of credit used
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Can you clarify? Your links seem irrelevant to the question, and your advice to charge things and not pay them off is A) a bad idea, and B) not supported by any of the FICO criteria you list. Perhaps I misunderstand your point? –  Steven Jul 1 at 19:16
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@Steven - Your credit score isnt necessarily how awesome you are at managing your money. The higher your credit score, the more beneficial it is for the bank to lend to you. If you never pay off your debts, then the credit card company never gets their money. Conversely, if you ALWAYS pay your debts in full every month, the credit card company never gets any interest. The sweet spot is in the middle somewhere. –  Mike Christiansen Jul 1 at 20:04
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@MikeChristiansen: Theoretically true. However, a lot of us "deadbeats" -- which in the credit card world means those who pay it off in full every month -- have found we can achieve a high credit rating without trying to game the system, simply by continuing to pay reliably. Remember, they make money from merchant fees every time you charge something, whether you pay interest or not. What they want to know is that, if they DO lend you money, they'll get it back. –  keshlam Jul 1 at 21:11
    
Nowhere on any of my credit reports had it ever been mention whether I paid financing charges or not. Only whether I pay on time/as agreed or X-days late. –  littleadv Jul 2 at 8:11
    
@littleadv That's true -- it won't appear as a line item. But let's be honest, the bank is smarter than you. They're not in the business of giving money away. Pay close attention to the MyFICO website information above: 15% is the length of your credit history. If you're in the business of STAYING IN DEBT, the bank will be MORE inclined to give you more debt to pay off. If you pay off all your debt you will eventually have a credit score of 0. Why do you suppose that is? –  Dan Esparza Jul 2 at 13:31

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