Balance Between Spending and Saving – G.P. Sharp, April 19, 2011
Spending or saving is one of the most crucial aspects of your credit, and one of the most difficult to manage. Typically, getting that pay check means spending it on all the things you’ve been waiting for. It can be anything, from a 52″ Ultra-plasma paper-thin television, to a computer, to a gaming console. But saving seems like the last thing you want to do with your money, and when you’ve got a credit card, trouble can quickly follow.
Credit lines are wonderful things to have on hand, and make those last minute impulse purchases all too easy. But the trouble is that debt has been mounting steadily in America the last ten years, increasing in the average household by thousands of dollars–and with the recession, there doesn’t seem to be any sign of stopping. People have less money than before, but they aren’t spending less–which is part of what created the recession in the first place. But enough of that. The question now is then: spend or save?
Well, typically, if you can save, there doesn’t really seem like a good argument not to. Especially if you have credit card debt. The line between spending and saving is largely defined by your income, and whether or not you can spend without putting yourself into greater debt. Credit bureaus don’t necessarily look at your income when they determine your credit score, but your debt-to-income ratio is important, because it plays a part in your maximum credit limit.
If you’re spending more than you’re earning, and you run your credit load up to the max, your score will take a significant hit. As stated in previous articles, your maximum credit load on any one card should never really exceed 20-30% of your available credit. The higher you run this percentage, the worse it’ll impact your credit score.
What’s more, spending when you don’t actually have that money to spend–that is to say, when your debt far exceeds your income–will make it excessively difficult to bring your score, credit history, and debt under control. Spending tends to work in a snowball fashion, and one credit card easily segues into two and then three, until there’s no end to the bills. If you have debt, try setting as high a percentage of your monthly income towards paying down that debt as possible. If you can afford it, 60% is a good number to aim for. The most important thing is to keep in mind that the debt will only come down when it’s paid off–and there’s no better time to start than today.
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