Credit is neutral – neither good or bad.Having access to credit is good. Using excess credit is potentially bad. Having excess credit comes with pros and cons, depending on how it is managed. This article highlights the good and bad of carrying credit.
Pros of Excess Credit
Increased purchasing power
With excess credit, you have the ability to make large purchases or take advantage of opportunities that may not be possible with limited credit.
Better credit utilization
Your credit score is determined in part by your credit utilization ratio, which is the amount of credit you are using compared to your total credit limit. If you have multiple credit cards with low balances, your credit utilization ratio will be lower, which can help improve your credit score.
Improved credit score
A diverse mix of credit can also help your credit score. This means different types of credit, such as credit cards, loans, and a mortgage. Having a mix of credit shows lenders that you are able to manage different types of credit responsibly, which can be viewed favorably.
Emergency funding
Having excess credit can serve as an emergency fund in case of unexpected expenses or financial emergencies.
Cons of Excess Credit
Temptation to overspend
With excess credit, there may be a temptation to overspend and accumulate debt, which can negatively impact your finances and credit score.
Difficulty managing finances
Managing multiple credit cards and loans can be overwhelming and difficult to keep track of, especially if you have different due dates and interest rates to manage.
Potential for identity theft
With excess credit, there is a higher risk of identity theft, which can result in fraudulent charges and damage to your credit score.
In conclusion, while having excess credit can provide increased purchasing power and serve as an emergency fund, it can also lead to overspending, high debt-to-income ratio, difficulty managing finances, and potential for identity theft. It’s important to use credit responsibly and manage it carefully to avoid the negative consequences of having too much credit.