Credit Cards: What You Need to Know

Credit Limits:

When credit card companies extend a line of credit to you, they also give you a limit. This means you can only spend a certain amount on that credit card.

Why are credit limits important?

They contribute to your credit utilization ratio, which has a big effect on your credit score.

Your credit utilization is calculated by dividing the balances you’ve charged by the total of all of your credit limits. Anything higher than 30% can damage your credit.

How Much Credit Can You Afford?

Never borrow more than 15% of your yearly net income.

EXAMPLE: If you earn $500 a month after taxes, then your yearly net income is: 12 x $500 = $6,000

Calculate 15% of your annual net income to find your safe debt load. $6,000 x 15% = $900. So, you should never have more than $900 of debt outstanding.

Note: Housing debt (i.e. mortgage payments) should not be counted as part of the 15%. Monthly payments shouldn’t exceed 10% of your monthly net income.

EXAMPLE: If your take-home pay is $500 a month: $500 x 10% = $50. Your total monthly debt payments (not including your mortgage) shouldn’t total more than $50 per month.

How Do Lenders Decide Who Qualifies for a Credit Card?

Lenders and credit card issuers alike use the “Three Cs” to determine creditworthiness:

CHARACTER: Will you repay the debt?

  • Have you used credit before?
  • Do you pay your bills on time?
  • Do you have a good credit report?
  • Can you provide character references?
  • From your credit history, does it look like you possess the honesty and reliability to pay your debts?
  • How long have you lived at your present address?

CAPACITY: Can you repay the debt?

  • How long have you been at your present job?
  • Do you have a steady job?
  • What is your salary?
  • How many other loan payments do you have?
  • What are your current living expenses?
  • What are your current debts?
  • How many dependents do you have?

CAPITAL: What if you don’t repay the debt?

  • What property do you own that can secure the loan?
  • Do you have a savings account?
  • Do you have investments to use as collateral?

 

If you’re looking for more ways to save and plan ahead for a brighter financial future, visit your KOFE portal or call a KOFE coach for more information.

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