Why is it generally advised to avoid borrowing up to your credit limit on a credit card?

• A. It can negatively impact your credit score due to a high credit utilization ratio.
• B. It automatically increases your available credit limit.
• C. It results in immediate forgiveness of your outstanding balance.
• D. It guarantees a lower interest rate on future loans.

Answer: (A)

Verified step by step guidance

1. Understand the concept of credit utilization ratio: This is the percentage of your available credit that you are using. It is calculated as (Total Credit Card Balance ÷ Total Credit Limit) × 100%. A high credit utilization ratio can negatively impact your credit score.
2. Recognize the impact on credit score: Credit utilization is a key factor in determining your credit score. Generally, it is advised to keep your utilization below 30% to maintain a healthy credit score.
3. Clarify why borrowing up to the credit limit is problematic: When you borrow up to your credit limit, your credit utilization ratio reaches 100%, which is considered very high and can signal financial distress to lenders and credit bureaus.
4. Debunk the incorrect options: Borrowing up to your credit limit does not automatically increase your available credit limit, result in forgiveness of your balance, or guarantee lower interest rates on future loans. These are misconceptions.
5. Conclude with best practices: To avoid negative impacts on your credit score, aim to use only a small portion of your available credit and pay off balances regularly to keep your utilization ratio low.