Understanding credit card limits can play an integral part in proper credit card management. Here’s everything you need to know about credit card limits.
A credit card limit is the maximum amount you can charge to your card at any given time. Your credit card limit is typically determined by things like your credit rating, your income and your payment history.
Credit card limits can be as low as $500 (common with student cards or cards for those without a long credit history) or go upwards of $50,000 and more for those with high incomes who qualify for ultra-premium credit cards.
It’s important to note that there is no such thing as a universal “good” credit card limit. What makes a good credit limit is different for each individual.
Low limits are sensible for people without a lot of experience using credit cards. Higher limits, while often appealing, are not advisable for card holders who might be tempted to spend beyond their means, resulting in ballooning credit card debt.
A good credit limit is one you can manage. In fact, if you think a large credit limit is too hard to resist, you can even ask your credit card issuer to lower your limit.
You can go over your credit card limit, but most credit card issuers will charge you a fee if you do. If you exceed your limit too many times, your credit card provider may deny the purchase or decrease your limit.
The most responsible way to raise your credit card limit is to reach out to your provider to request an increase. You can contact your provider directly by phone, or most financial institutions allow you to apply for a credit card limit increase online. Just look for the “Request A Credit Card Increase” link usually found under Account Services.
Occasionally, if you have a good history of making your payments on time and have had your credit card for a while, credit card companies may ask if you want to increase your credit limit. Interestingly, because higher credit limits often lead to an increase in debt, Canadian credit card issuers are not permitted to increase your credit card limit without your express consent verbally or in writing.
One of the main factors determining your credit score is your credit utilization ratio, or how much credit you’re currently using compared to the total amount of credit available to you. Believe it or not, credit utilization accounts for a whopping 30 per cent of your credit score, and it’s directly affected by your credit limits.
Experts generally suggest that you have a credit utilization rate of no more than 30 per cent. So, for example, if you have a total available credit amount of $100,000 through loans and credit cards, you would not want to borrow more than $30,000. If you use up too much of your available credit, lenders will not perceive you as creditworthy because you could be over-leveraged and at risk of defaulting on your payments.
However, increasing your credit card limit could improve your credit score because you’re increasing your available credit, which in turn decreases your credit utilization ratio. But this is only the case so long as you don’t increase your spending such that you exceed a credit utilization rate of more than 30 per cent.
Sandra MacGregor has been writing about personal finance, investing and credit cards for over a decade. Her work has appeared in a variety of publications like the New York Times, the UK Telegraph, the Washington Post, Forbes.com and the Toronto Star. You can follow her on Twitter at @MacgregorWrites.