Your credit card limit, or how much money a bank is willing to let you spend on your credit card, is a key determinant for your financial success. Here are a couple of tips to better understand and make the most of your credit card limit.
How is your credit card limit determined?
Banks use your credit score and monthly income to determine how much money they are willing to lend you every month. This graph from Credit Karma offers a good representation of what credit limit to expect depending on your credit score.
Lower Credit Utilization = Higher Credit Score
Most people recommend trying to keep a credit utilization ratio below 30%. Ideally, though, people with the best credit scores keep their credit utilization at 10% or below.
Credit utilization accounts for 30% of your FICO score. Now what does this mean? Essentially, credit utilization is how much of your monthly credit card limit you are using. If your credit card limit is $1000 and your monthly balance (how much you spend) is typically $300, this means that you have a credit utilization of 30%.
Increasing your credit limit is therefore a quick way to decrease your credit utilization and increase your credit score. Let’s assume you still spend around $300 a month. If your credit limit were to be increased from $1000 to $2000 then your credit utilization would be lowered to 15%. Very important to note, though, if an increase in your credit limit means you will be spending more money, the positive effects of a higher credit limit will be negated. Don’t see a higher credit limit as an opportunity to spend more money. Instead, see it as an opportunity to increase your credit score considerably.
Low Credit Card Limit
According to a study conducted by Experian, the average credit card limit went down 11% from 2014 to 2015. Nonetheless, don’t be discouraged if your initial credit limit is lower than you expected. Most certainly, don’t follow advice from Trump University and lie about your income to receive a higher credit limit.
If you use your credit card responsibly, the issuing bank will periodically raise your credit limit. If they don’t, and you feel like you qualify for a credit limit increase, feel free to reach out to your issuing bank and make your case. They are typically receptive to these demands, especially if you have been using your credit card responsibly or have increased your annual income.
Work towards increasing your credit card limit to better your credit score, BUT do not take credit limit increases as an opportunity to spend more than you should.