If you know you don’t have the money to pay your credit card balance, put the card away. Don’t use it until you can afford to.
Thinking about making a credit card purchase? Before you swipe your card, consider how much you can afford to charge. It will have an effect on your wallet and your credit score.
One of the principles of building a good credit history and staying out of debt is charging only what you can afford to pay. But just how much is that? The amount varies from one person to the next depending on each person’s income, expenses, credit limit, and other credit card balances.
Charge only what you can afford
The amount you can afford to charge mostly depends on your discretionary income – what you have left after taxes and other necessary expenses have been paid.
Most employers withhold taxes directly from your earnings. In this case, what you're paid is your net income or disposable income. Then, from your disposable income, you pay bills, buy groceries, and fulfill other financial obligations. Anything you have left is what you might call your “spending money” or, more technically, your discretionary income. You would use your spending money to pay off your credit card balance, so you should never charge more than you have available to spend.
Disposable Income – Necessary Expenses (rent, utilities, etc.) = Discretionary Income
Your credit score thrives when you pay your credit cards in full each month. So, if your discretionary income is $1,000, the most you can afford to charge is $1,000. Don’t forget to take into account money you might spend on clothes, entertainment, etc.
Other factors to consider
Credit limit. Besides your discretionary income, you should also consider the credit limit on your credit card. Never charge more than your credit limit. In fact, you should stay well below your credit limit to protect your credit score. The best practice is to keep your credit card balance below 30% of your limit. So, on a card with a $1,000 limit, you shouldn't charge more than $300.
Credit card balances. If you have balances on other credit cards, it’s best to pay off those balances before making any new credit card purchases, especially if you’re already having difficulty making payments.
Emergency fund. Having an emergency fund keeps you from having to use your credit cards in case of a financial emergency. If you don’t already have one, you should build an emergency fund rather than making new charges on your credit card.
Future loan applications. Will you be applying for a mortgage or car loan in the near future (six months or less)? If so, the only thing you should be doing with your credit cards is paying off the balance. Mortgage and auto lenders don’t want you taking on any new debt before approving you for a loan. So, if you’re going to be applying for a loan soon, leave the credit cards in your wallet at least until after you’ve been approved.