Understanding your credit limit and how to use it
Did you know that one of the easiest ways to boost your credit score is by properly managing your credit limit? We’ve put together some tips to help you do just that, including a review of how your credit limit is determined and what role your credit cards play in the process.
What is my credit limit?
It’s the maximum line of credit extended to you by a lender. Think of it as the maximum amount you can charge within a given period of time (though you don’t usually want to charge that much, which we’ll explain later). If you don’t know your credit limit on a given card, it’s easy to find. Generally, your limit is included on your credit card statement or is available via your online account. You can also call the number on the back of your card to ask your provider.
Why does my credit limit matter?
Part of your credit score is determined by how much of your total credit you use. Having a good credit score can affect your ability to get financing on things like a home or car, start a business or get certain types of jobs.
On a credit card, the size of your balance is compared to your total credit limit to determine what’s called your credit utilization or debt-to-credit ratio.
For example, someone with a $1,000 total credit card limit and $950 in total credit card debt has a high credit utilization—95 percent—and a high debt-to-credit ratio of 9.5 to 10. This kind of high debt-to-credit ratio could send a signal to potential lenders that you may face credit trouble down the line.
Generally, you want to use 30 percent or less of your available credit; that means keeping your monthly balance below $300 if you have a $1,000 credit limit. This is one reason why it’s a good idea to keep your credit card balance as low as possible in relation to your total credit limit. Of course, paying your balance in full each month is the best practice. If you can’t, paying as much over the minimum as you can is a good idea.
What happens if I go over my credit limit?
Charging too much on your credit card can have a number of negative consequences. Credit card lenders may assess overcharge fees, decrease your credit limit or even close your account if you go over your limit habitually. Lenders may also increase your interest rate if your credit history shows that you regularly exceed your credit limit, and your credit score may be negatively affected. So know your limit—and always keep track of how much you have charged.
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