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Getting approved for a credit card is exciting, and it’s tempting to think about all the purchases you could make. But before you start swiping, it’s crucial to stay mindful of your credit limit and manage your spending wisely.
What Is a Credit Limit?
Your credit issuer sets a limit on your credit card spending, known as your credit limit. Once you hit this limit, you can't make more purchases until you pay down your balance – the amount spent and owed to the lender.
Calculate your available credit by subtracting your outstanding balance from your credit limit. This difference shows how much credit you can use. Always check your balance before buying to ensure enough available credit.
What Determines My Credit Limit?
Lenders use several things about you to determine your credit limit. In addition to your income, when they pull up your credit reports, they examine other factors including:
- Credit Score - Do you have good credit scores and are you more likely to pay your bills?
- Credit History - How long is it and how have you managed it through the years?
- Relationship to Creditors - Do you pay your bills on time with your other lenders?
- Debit-To-Income Ratio - How much money do you owe versus how much you make?
- Credit Utilization - What is your credit balance versus your available credit for all accounts?
Before applying for a new credit card, it's good practice to look at your credit reports to see what past credit card issuers have said about you.
Does My Credit Limit Affect My Credit Scores?
If you carry a high balance but still pay your credit cards on time and never go over your limit, you may think this has no effect on your credit scores. Unfortunately, it does and directly impacts your credit utilization ratio. This ratio looks at your credit limit and compares how much you owe to how much credit you have available. If your available credit is low but your balance is high, it can lower your credit scores.
To lower your credit utilization ratio, credit card companies and financial experts recommend you keep your credit card balance low and spend no more than 30% of your available credit. As your ratio goes down you will notice your credit score go up.
If I Go Over My Credit Limit, What Happens?
It's not as easy for you to go over your limit as it used to be. In 2009, the Credit CARD Act was passed to limit credit card issuers from charging excessive fees to consumers who go over their limits. Today, in order for you to exceed your credit limit, you must see if your issuer offers a program that allows you to opt-in and agree to pay over-the-limit fees each time you pass your credit limit.
Even if you agree to this, it's not good to go over your limit. Those fees can add up quickly and leave you in a bad financial situation. If you decline to opt-in and still use your credit card, your only consequence is that your transaction would be declined.
Tips To Stay Within Your Credit Limit
If you decide to opt-in for the ability to go over your limit, but you don't want to make it a regular habit, here are some tips for you.
Sign Up for Balance Notifications
Knowing your balance can keep you from getting too close to the edge. Check with your lender to see if they offer balance notifications that will alert you when your available balance is low.
Check Your Balance Regularly
If your lender doesn't offer balance notifications, get into the routine of checking your account on a regular basis. You don't have to do this every day, but if you know your balance is high, be sure to check it before you make a purchase.
Consider Opting-Out
You still have the option to opt-out of your overdraft program. This is the best way for you to keep yourself from going over your limit and racking up a bunch of fees.
Each of these tips can save you money and help you avoid getting hit with over-the-limit fees.
Why Would My Credit Limit Change?
You may notice a change in your credit limit if you've kept your balance low and have a history of paying on time. Lenders often reward customers with a higher credit limit as a way to try and entice them to spend more. It could also help raise your credit score if you resist the urge to start spending and run up your balance. Another way to increase your limit is by asking for one and allowing your credit card company to recheck your income and credit reports.
A less common change in your credit limit could occur if your creditor lowers your limit. Although this is less likely, it could happen if you file for bankruptcy or your credit score goes down significantly. While you need to be aware of this, it's not something that you should fear.