The cost of modern living virtually dictates that most people need access to some level of credit. However, with credit card companies and finance companies continually extending credit facilities to borrowers, there is always a question of how much credit is too much.
There is no simple answer to this as personal circumstances will dictate the level of credit available and whether it is too much or if it is sufficient. A more crucial thing to consider is whether it is the right type of credit that is available. The ability to get a great deal on a mortgage is highly preferred over having excessive credit limits on credit cards, as a good mortgage deal will ensure affordable living while excessive credit card limits may lead to impulsive buying or living beyond your means.
It basically comes down to how you manage credit that is available to you. A person who is highly responsible and using credit the right way will always have full control over their finances. This means they will always look to pay off credit card debt before interest becomes payable. It also means the credit card companies will look to increase their line of credit and entice them into buying more expensive items by offering lower interest rates.
For example, if a person has $100,000 available credit but only uses a maximum of $5,000 at any time. If their debt payments are always paid in full on time and they keep a low debt to credit ratio, then it will not matter how much credit is available to them if they continue to manage their money in the same way. It will take a lot of self-control to resist the marketing efforts of credit card companies and finance companies, although it is possible to live without the latest new car or latest plasma television.
Similarly, if a person has $5,000 available credit but is always running their balance close to their credit limit and making only the minimum repayment each month, then it may suggest that $5,000 is enough. If their credit line is extended by $500 and they instantly use up the additional credit, then it should suggest that they have enough credit already and any further credit is only going to trap them into further debt.
The following questions will help you work out whether you are close to the level of credit where you need to exercise self-control or seek professional advice before debt becomes problematic.
1. Do credit card companies regularly increase your credit limit?
If a credit card company regularly increases your credit card limit you will need to exercise self-control as it can become too easy to use up additional credit just because it is available. If you continually use up new credit available, you will eventually be trapped in perpetual debt and end up repaying mainly interest on money borrowed.
2. Do you pay off your credit card bills in full each month or only make the minimum repayment?
If you manage to pay off your credit card bills in full each month then you need to be weary of credit card companies enticing you to use your card more often by offering lower interest rates. Additionally, a credit card company may also increase your credit limit and you should maintain your self-control and not fall into their trap.
If you are only managing to repay the minimum amount each month then you are already at the point where any additional credit is only making the problem worse. Instead of looking for additional credit you need to look at ways on how to manage existing debt. If you are currently in this situation then you may need to look at setting up a budget to manage existing debt and it may also be helpful to figure out which credit cards to repay first.
3. Do you have a large amount of credit available on credit cards?
If you find yourself with plenty of credit available on cards you need to exercise self-control. The temptation to buy a new car on your card might be too much to resist, but it is better to resist all temptation and only use a credit card for large purchases if they are emergencies. A new car isn't an emergency compared to having to pay a large medical bill.
Overall, the way you manage credit will always dictate the level of credit that is too much. If you fall into the trap of borrowing money on credit cards then it is much safer to keep a lower credit level where it is easier to manage. If you fail to keep control of the level of debt when it is easily managed, it will only lead to further problems whenever your available credit limit is increased.