Your credit limit is the maximum amount of money you can owe on a credit card or line of credit before being charged interest. A bank or credit union offers a line of credit, which is a flexible loan. Keeping track of your credit limit is critical for staying out of debt and improving your credit score. If you apply for a credit card and are approved, for example, you can be given a $5,000 credit limit if you have good credit. Someone with good credit, on the other hand, might be approved for a credit card with a limit of more than $20,000. Regardless of the credit limit, how the card is used and your payment history decide whether you build or diminish your credit score.
What Is a Credit Limit and How Does It Work
When you apply for a credit card or a line of credit, your credit issuer establishes your credit limit. To make its choice, it considers your income, current debt level, and credit history. For example, if you have a history of late payments or a high debt-to-income ratio, you may be accepted for a modest credit limit to begin with. Your credit limit is affected by your payment history, the length of time you've had credit accounts, credit inquiries, credit ratings, and the type of credit you have. You won't know your credit limit until you've submitted an application for a credit card and been authorized. A secured credit card, which is secured by a cash deposit, is an exception. If you cease making payments on your card, the cash deposit is used to pay it off. The credit limit on your card is normally equivalent to your security deposit. You can seek a higher credit limit or decline the credit card if you're (fairly) unsatisfied with the one you've been given. Your credit limit may change during the course of your credit card relationship. If you use your credit card responsibly and pay your bills on time, you may be eligible for periodic credit limit increases, even if you don't ask for them. Similarly, if you fall behind on payments or if your debt grows to a level that the credit card issuer considers hazardous, your credit limit may be reduced. Logging into your online account or calling your credit card's customer service will reveal your credit limit on your billing statement.Can You Use a Certain Percentage of Your Credit Limit
You have the ability to make purchases up to the amount of your credit limit. If you haven't opted in to have over-the-limit transactions handled, you may not be able to go above your credit limit. Transactions that potentially push you over your limit will be denied if you don't opt-in. If you choose to opt-in, going above your credit limit may result in an over-the-limit fee as well as a penalty rate. In certain cases, your card issuer may charge you a penalty rate, which is a higher interest rate. To avoid being caught off guard, examine your credit card agreement to discover if your card issuer penalizes you for exceeding your credit limit. Your credit limit has an effect on your credit score as well. Your credit limit and card balance are reported to the credit bureaus once a month. This data is used to compute your credit usage, which is the percentage of your credit limit that you are utilizing. It can account for up to 30% of your credit score. Your credit usage will be higher if your credit card balance is higher than your credit limit. This lowers your credit score, making it more difficult to obtain loans and credit. If you have a significant credit card balance, your card provider may refuse to increase your credit limit. It's ideal to keep your credit card balances under 30% of your credit limit if you want to improve your credit score.Credit Limits vs. Other Options
Some credit cards have no defined credit limit or expenditure restriction. Credit cards with no spending limit do not provide you with an unlimited quantity of credit. Instead, these cards feature a variable spending limit that varies depending on your spending patterns, income, credit history, and other criteria. Each card issuer uses its own algorithm to determine your spending limit, and at the issuer's discretion, you may be able to go above your limit without incurring a penalty.Important Points to Remember
- Your credit limit is the maximum amount of money you can owe on a credit card or line of credit before being charged interest.
- When you apply for a credit card or a line of credit, your credit limit is determined by your credit card provider.
- You can make purchases up to your credit limit, but if you haven't signed in to have over-the-limit transactions processed, you may not be able to go above it.
- Some credit cards have no fixed credit limit or expenditure restriction. Instead, these cards feature a variable spending limit that varies depending on your spending patterns, income, credit history, and other criteria.
