Putting the title of this article another way, how much can you owe on your credit cards before it lowers your quality of life? There’s never an absolute number — if you’re living on your Social Security, it could be as little as $5,000 on a single high-interest-rate credit card.

If you’re Amazon’s Jeff Bezos, currently the world’s richest person, there is no such number. But for the rest of us, there’s a point of credit card indebtedness that will cause the credit-rating agencies to lower your credit score enough to make your life more difficult.

Debt and Your Credit Score

Credit scores, or FICO scores, range from 300 — which is almost unachievably awful — to 850, which is admirable but impossible. Persons with extensive credit histories — for a decade or more — and very low debt-to-income ratios can inch their way over 800. Most of us will have to be satisfied with a somewhat lower score.

According to Experian, one of three large credit-rating agencies, most scores range from 600 to 750. To get really good credit-card interest rates, you have to be close to the top of that range. Anything below 700, and you’ll pay a penalty — or, really, one of several penalties.

With a score lower than 620 you’ll probably have trouble renting an apartment. With a score lower than 640, you’ll pay about 1 percentage point more on a home mortgage than someone with a score of 760. With a score much lower than 750, you’ll pay from one to three points more on your credit cards.

So, it’s important to conduct your personal finances in a way that keeps that score high.

Since you can’t artificially extend your credit history, the most effective thing you can do to keep your score above the Plimsoll line is to keep your credit card utilization ratio within limits the credit-rating agencies find acceptable.

The credit card utilization ratio is calculated by dividing your total credit card debt by your credit card capacity — the total amount of credit available on all your cards. If, for example, you have three credit cards with a total capacity of $15,000 and you owe a total of $5,000, your utilization ratio is $5,000 divided by $15,000, which is 33 percent.

The Utilization Feedback Loop

There’s a feedback loop involving utilization and capacity:

  • Your credit score is affected by how much of your available credit — your total capacity — you’ve used on your credit cards.
  • But your credit card utilization ratio is a function of how much credit you’ve been extended in the first place.

The interaction of capacity and utilization ratio can create a pernicious feedback loop that keeps low scores low and high scores high. If you’ve got a relatively low FICO score, you’ll be offered a card with a relatively low limit, and if you’ve got a high score, you’ll be offered cards with high limits.

If you put $4,000 on a card with a $20,000 limit, credit rating agencies will be just fine with it —your utilization ratio is an acceptable 20 percent. But if you put $4,000 on a card with a $5,000 limit, your utilization ratio is 80 percent and the credit-rating agencies will lower your credit rating further because your utilization ratio is way too high — anything above 30 percent is considered problematic.

Credit card companies tend to offer new cards to individuals with high credit scores, which increases their capacity, thus raising their high scores further. Similarly, they tend not to offer new cards with individuals with lower scores, which means that any increase in indebtedness on their cards will lower their already low score a little more.

What to Do About It

While your credit card utilization ratio isn’t the only thing the rating agencies use to establish your score, it’s important because it accounts for almost a third of the total. This means that once your score drops, getting it back up can be difficult.

While you need some credit history in order to get a rating, once your access to credit becomes limited, using your available credit can keep you score low or even lower it further. But there are a few simple things you can do that will repair the damage.

Please note that hiring a "credit score repair service" isn’t one of them — at best they’re an unnecessary expense and at worst they’re a scam. Yes, there are actions they can take that will help — like challenging your current credit score ratings at the three bureaus — but you have a legal right to do these things yourself.

The first thing to do to get your score back up is the most obvious: don’t use your credit cards except in a real emergency. Gradually, as your balances come down, your score will rise. Once your score nears 700, you can then apply for another card. It probably won’t have the greatest interest rate, but that’s OK because the whole point is not to use the card except as a way of adding capacity.

Once you’ve added capacity, even though the amount you owe may be exactly the same as it was before you added the new card, your credit card utilization ratio will drop and, as a result, your credit score will rise.