With any credit card, there is usually a limit to how much you can spend. And experts say choosing the right credit limit can play a key role in maintaining good credit standing.
A credit limit is the maximum amount you can borrow on a credit card or account, based on factors such as your income, credit history, and ability to repay.
“Generally speaking, it’s better to have more credit, unless you’re using it as a crutch to overspend or take on too much debt,” says Ted Rothman, a senior industry analyst at Bankrate who specializes in the credit industry.
Experts often recommend setting a credit limit that’s significantly higher than what you spend in a month to maximize your credit score. Rothman said the “ideal” credit limit depends on an individual’s spending habits and preferences.
Optimal limit for credit score
Dean Tsantes, a certified financial planner and financial advisor at VLP Financial Advisors in Vienna, Virginia, says that to keep your credit score high, it’s best to use only 10% to 30% of your available credit and pay off your statement in full each month.
The percentage of your available credit is a metric known as your credit utilization ratio. Keeping your utilization ratio low shows lenders that you’re managing your credit responsibly, which can help improve your credit score, but hitting that limit each month shows lenders that you’re overly reliant on credit and may be an increased lending risk, resulting in a lower score, Rothman says.
Working backwards from an ideal credit utilization ratio of 10% to 30%, if you typically spend about $5,000 a month on your card, your limit should be $50,000, Tzantes says. On the same basis, if you typically spend about $2,500 on a card, $25,000 might be a good limit, he added.
“The idea is that we’ll never get close to that limit,” Tzantes said. The seemingly high limit isn’t meant to be money you can spend, but rather as a buffer to keep your balance well below the limit and your credit utilization low.
It may also be wise to consult a trusted financial professional who can help you determine the amount of credit that is reasonable for you.
It’s okay to stick to more realistic limits
Credit card debt can be costly and difficult to repay. So if you know you’re likely to think of your credit limit as the amount of money you have available each month, it might be wiser to stick to a limit that only covers the bare essentials and have a little buffer, Rothman says.
“The last thing you want to do is reach or approach that limit or spend more than you can repay,” he says. “Increasing your credit score is good, but if you use it as a means to spend money, it can be dangerous.”
However, it’s possible to maintain a low credit utilization rate even with a lower limit, Rothman said. If your credit limit is enough to cover your necessities and you’re approaching your limit each month, there are “workarounds” you can take to reduce your usage, such as making additional payments throughout the month to keep your usage below 30%.
How to increase your credit limit
To increase your credit limit, you can either request a credit limit increase on your existing card or open a new card with a new line of credit, Rothman said.
Start by contacting your existing credit card issuer to see if requesting a credit limit increase will trigger a hard or soft credit check, he says. Hard inquiries can cause a small, temporary drop in your credit score, while soft inquiries are regular or informational checks that don’t affect your credit score.
If your issuer uses soft inquiries, you can raise your credit limit on your existing card, increasing your available credit and lowering your credit utilization rate without hurting your score, Rothman says.
If issuers are going to do more scrutiny, it may be more strategic to create new credit cards with different perks and perks, Rothman says. That way, he says, you’ll have more options to maximize your card’s overall benefits.
Increasing your credit limit can give you more spending power, but avoid treating that extra credit as extra money or an emergency fund for “desperate times,” Rothman says. Spending more than you can afford on your credit cards can result in high-interest debt that can be difficult to repay, especially if your financial situation is already tight, he says.
“Having a credit card with a $5,000 limit may certainly help you in a pinch, but it’s not the same as having $5,000 in the bank,” Rothman says. “This is debt. It can be a very expensive debt.”
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