Credit Limit – Understanding Why My Credit Limit Matters

What is a Credit Limit?

The credit limit is the maximum line of credit extended to you by a lender. Your credit limit is included in your card statement or is available through your online account. You can also call the number on the back of your card to inquire from your provider about your limit.

Credit Limit

Understanding Credit Limit

Each time a card lender approves you for a card, it sets a limit to the amount you can spend. This is what is known as your credit limit. Immediately you have reached your limit, you can no longer use your card until you pay down your balance enough to use all or some of it. On the other hand, some cards may allow you to exceed your limit but will charge an over-limit penalty fee.

It is lenders who decide how much of  limit to give you by assessing your entire financial picture. This includes the income you listed on your card application, and related factors like your history and how much debt you have already. This includes how much debt you are carrying as compared to how much available credit you have.

If it is backed by collateral (say, a home equity line), the lender will base the limit on how much equity you have in the home.

Your limit is not fixed. This means that it may change several times during the time you have the card. If you are in good standing with the lender, it may automatically raise your limit periodically.

Note also that some cards do not have a firm credit limit or preset spending limit.  Cards with no preset spending limit do not offer you an infinite amount of available credit. Rather, these cards have a fluctuating spending limit which changes depending on your current spending habits, income, credit history, and other factors. Each credit lender has its own formula for determining your spending limit, and you may be able to exceed your limit without incurring a penalty at the issuer’s discretion.

Why Does My It Matter?

One of the easiest ways of boosting your credit score is by properly managing your limit. Thus 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 in getting financing on things like a home, or car, start a business, and also in getting certain types of jobs.

When it comes to credit cards, the size of your balance is compared to your total credit in determining what’s known as your debt-to-credit ratio.

What Happens if You Go Over Your Limit?

If you habitually go over your limit, it may have negative consequences. Card lenders may assess overcharge fees, decrease you  limit or worse still have your account closed. Lenders may also increase your interest rate. If your history depicts that you regularly exceed your limit. And your credit score may be negatively impacted. Thus it is important that you always know your limit . And always keep track of how much you have changed.

Also, a line of credit that has reached or exceeded its limits is considered maxed out. While the line of credit is maxed out, it cannot be used for any other further activity except the consumer is able to pay off at least some of the debt to enable it to fall below the limit, the creditor agrees to extend the limit, or allows one or more additional purchases with the charging of an over-the-limit fee.

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