Managing Your Credit LimitNovember 3, 2010 - 8:21 am
Your credit limit is the maximum amount you can charge on your credit card without receiving a penalty. After you apply for a credit card, the credit card issuer will let you know what your credit limit will be. It’s important that you keep your credit limit in mind as you use your credit card.
Choose Whether to Pay the Over-the-Limit Fee
Expect your credit card issuer to ask if you want to opt-in or opt-out of over-the-limit fees. This means you decide whether you want your card issuer to process over-the-limit transactions or not. If you decide to opt-out, your over-the-limit transactions will be declined. You’ll have to go without these purchases or choose another method of payment.
On the other hand, if you decide to opt-in, your over-the-limit transactions will go through, but there may be some penalties. You might be charged a fee for going over your credit limit, but the fee can’t exceed the amount you went over the limit. Going over the credit limit could also trigger the default rate, which is the highest interest rate charged on your credit card.
Credit Limit and Your Credit Score
Your credit limit and your credit card balance have an impact on your credit score. When your credit score is calculated, your credit utilization is taken into account. This is how much of your available credit is being used. It’s best to keep your credit card balance below 30% of your credit limit.
The 30% rule doesn’t just help you build a good credit score, it also keeps your credit card balance at a manageable level. A low credit card balance is easier to repay. You’re less likely to accumulate more credit card debt than you can handle if you follow the 30% rule.
Getting Credit Limit Increases
As you show you can handle the credit limit you’ve been given, your credit card issuer may increase your credit limit. As your credit limit increases, so does the amount you can comfortably charge (from a credit score perspective). But you should still keep your finances in mind, when you’re making purchases. Never spend more of your credit limit than you’re able to repay.
Some credit card issuers automatically increase your credit limit after you’ve been making timely purchases for a period of time. Other card issuers require you to apply for a credit limit increase. Be wary of credit limit increase fees charged by some issuers.
An increased credit limit can be better for your credit score, as long as you keep your credit card balance low. However, if you think a higher credit limit is dangerous for you – i.e. you could potentially charge more than you can afford – don’t be afraid to ask your credit card issuer to reduce it. You can always apply for another credit limit increase in the future when you can better handle it.
Think of your credit limit as a revolving loan that you can borrow from and repay as you need to. You don’t want to take too much of the loan, because that leaves you with a lot to repay and only a little that you can re-borrow in the future. Fortunately, as you pay back your loan, you have more credit available that you can use.