Yes, cardholders can use their credit cards up to their assigned credit limit. Credit utilization refers to the percentage of available credit that a cardholder is currently using. It is an important factor in credit scoring and can significantly impact a person’s creditworthiness.
Here’s how credit utilization works:
Credit Limit: The credit limit is the maximum amount of money that a cardholder is allowed to borrow or charge on their credit card. It is determined by the credit card issuer based on the cardholder’s creditworthiness and other factors.
Balance: The balance on a credit card represents the total amount of charges and purchases made on the card that have not yet been paid off. This balance can fluctuate from month to month, depending on the cardholder’s spending and payment habits.
Credit Utilization Ratio: The credit utilization ratio is calculated by dividing the outstanding balance on a credit card by the credit limit. For example, if a card has a $1,000 balance and a $5,000 credit limit, the credit utilization ratio is 20% ($1,000 / $5,000).
Impact on Credit Score: Credit scoring models consider credit utilization as a key factor in determining credit scores. A lower credit utilization ratio is generally better for credit scores. FICO, one of the most widely used credit scoring models, typically advises keeping credit card utilization below 30%.
Managing Credit Utilization: Cardholders can manage their credit utilization by paying down credit card balances, avoiding maxing out their cards, and keeping balances well below the credit limit. Responsible use of credit includes using only a portion of the available credit.
Regular Monitoring: Cardholders should regularly monitor their credit card balances and credit utilization to ensure they are within their comfort zone and in alignment with their credit score goals.
High credit card utilization can indicate to lenders that a person is relying heavily on credit and may be at a higher risk of defaulting on payments. Therefore, it’s generally recommended to keep credit utilization as low as possible to maintain a healthy credit profile.
Additionally, it’s important to note that credit card issuers may periodically report credit card balances to credit bureaus, and this information can impact credit scores. Cardholders should aim to pay credit card bills on time and in full whenever possible to avoid paying interest charges and to maintain a positive credit history.