3 Simple Revolving Credit Rules You Should Follow to Borrow Better

Revolving credit is the official term describing credit cards and lines of credit. It earns this circular label because of the way you access these funds. 

Unlike term loans, which close when you pay them off, revolving credit accounts are open on a recurring basis. You just have to make sure you pay off what you use to get access to your full limit. 

A revolving line of credit or credit card may offer financial flexibility when you need help in an emergency. That’s why so many people rely on these accounts when the going gets tough.

But just because they’re popular, doesn’t mean they’re understood. Here are three relatively unknown rules that can help you make the most of these revolving accounts.

Rule #1: A 30% Utilization Rate

Starting the list off with the most popular rule, the 30% utilization rate is a commonly shared tip by financial advisors. It indicates you should never use more than 30% of your credit limit at any given time. Any higher could look bad on your credit report. 

How your utilization rate affects your score depends on what already exists in your file, so you can take this rule with a grain of salt. It’s meant more to make you aware of how often you use your revolving accounts. 

Generally speaking, 30% is the highest you should ever get. Keeping revolving debt as low as possible is your best chance at improving your credit and keeping your account available in emergencies.

Rule #2: The 15/3 Payment Hack

Switching gears to talk about debt payment styles, the 15/3 hack is a scheduling strategy. You can break down this rule into two steps:

  • Step #1: Make one payment 15 days before your statement date.
  • Step #2: Make a second payment 3 days before your statement date.

Why would someone complicate their payments like this? According to its proponents, the 15/3 hack could help you keep below the 30% rate. 

The catch? It only works on accounts that routinely report your payment history to the credit bureaus. That’s because only those accounts that get reported will affect your credit utilization. Usually, a lender only reports your utilization once a month, on your statement date.

This might be a helpful strategy for people who dip into their credit regularly throughout the month, but who can afford to pay off their balance in full. By splitting your payments in two — and paying by the statement date, not the due date — you can keep your usage low despite making multiple purchases.

Rule #3: The 20/10 Ratio

Last but not least, the 20/10 ratio is another debt payment approach. It stands out from the rest because it goes beyond just revolving accounts; it applies to all your debt, including student, auto, and personal loans, but excluding mortgage debt. 

The 20/10 ratio sets rules on how much you should spend on debt. 

  • Your total debt payments should take up no more than 20% of your annual net income.
  • Meanwhile, you shouldn’t spend more than 10% of your monthly take-home pay on debt.

This ratio serves as an exercise to flag high debt loads. If you spend more than these amounts, you could be stretching yourself too thin. You may want to refer to your budget to see how you can pay down debt and get back below these benchmarks. 

The Takeaway:

Sometimes, structure helps you manage your finances. But don’t worry — you can fudge the numbers a little and still reap the benefits. While these rules offer guidance, they aren’t set in stone.

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