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The responsible use of any kind of line of credit, whether it is home equity or credit card, can have a tremendous affect on your overall credit score. High balances and late payments can sink your score fast. If you’re going to have a balance on your card, you want it to be 30 percent or less of your available credit.  And, you always want to be focusing on moving your balance down. Think of credit like a pie. You may want to eat the whole thing, but it isn’t good for your waistline. So you nibble on and savor one little piece. It’s the same thing with credit: nibble at your credit and don’t gorge yourself.

You should be able to pay your credit balance(s) in full each month.  This reduces the impact of interest rates and keeps a healthy line of credit to use when needed. It may not always be possible, but it should be a goal. Think of it like a marathon race. People don’t start out going full force and maintain it for the whole 30 miles because they would eventually drop to the ground exhausted. Instead, they pace themselves.

Lines of credit are often used for emergency situations, such as car repairs, when the money isn’t there. It may be impossible to take care of the bill in a single month, but you should set a goal to pay a specific amount off every month (far more than the minimum) until it is paid off. Pace yourself. An emergency line of credit isn’t any good if your balance is too high to pay for the emergencies.

Be cautious when using lines of credit as a buffer for expenses. If you have a  $10,000 or $12,000 limit on a credit card with a $3,000 balance you are paying on, then something happens to drop your credit score significantly, you risk an evaluation at the bank level. The bank can decide that whatever balance you currently have is your new limit. There’s nothing like having the rug pulled out from under you by a credit card company.

Credit is expensive. Even low interest rates on large balances can be financially crippling to the point where even minimum payments can be tough to make. Lines of credit are an important part of maintaining and improving your credit score and can be important financial tools, but only when used correctly. Too many people become caught in the credit quagmire and become lost, with their credit gone, their credit score decimated and their lives impacted. Don’t be ruled by credit debt. Use it sparingly and in ways that it will give you the most financial gain. Time for pie?

A line of credit can be a valuable tool for a consumer, but only if it’s used responsibly. It can also be a trap that is very difficult to escape. Your new credit card may have a $5,000.00 limit, but should you go out right away and buy $5,000.00 worth of home theater equipment? If you couldn’t afford to buy all that gear before the card, chances are you’ll be stuck making just minimum monthly payment and carrying the balance for a very long time. By handling your line of credit irresponsibly, you’ve essentially trapped yourself.

So how do you avoid the trap? Under ideal circumstances, you should only carry a balance on your line of credit that can be paid in full every month. Two key things are accomplished when you get into this habit of credit use:

1)      You establish discipline over your spending patterns.

2)      You avoid revolving interest charges incurred by carrying an ongoing balance.

This approach, however, isn’t achievable for everyone’s financial situation. If you must use a line of credit to make a purchase, come up with a plan to pay off that balance in four to five months. You will incur some interest charges along the way, but you still get the all-important benefit of practicing discipline in your spending and reduce the amount of interest you pay. Remember, the goal here is responsible use.

A common pitfall is the idea that an available line of credit can serve as a buffer in times of financial hardship. If you’re carrying a balance of $3000.00 on a card with a $12,000.00 limit, you’re probably thinking, “Hey, I’ve got a $9,000.00 cushion I can use if something bad happens.” What most people don’t realize, however, is that banks and other credit lenders have the power to lower your credit limit if your risk level changes.

Let’s say the crisis hits. You lose your job, start paying bills a little later, and before you know it your credit score starts to drop. The bank’s risk evaluation department now determines that you are a higher credit risk and decides to drop your limit all the way back down to $3000.00 until you pay off the balance. Poof! The buffer you were depending on to get you through this financial drought is gone in the snap of a finger. The lesson here is that, in the end, saving money is the only way to create a reliable financial buffer to get you through life’s stormy seasons.

Use credit lines wisely. Don’t trap yourself with undisciplined spending and no savings. Make a payment plan and stick to it. Handling credit well is one of the most important keys to your overall financial freedom.