Personal Finance

What Is a Credit Limit? What Does Available Credit Mean?

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You’ve applied for a credit card and were approved (congrats!), but that doesn’t mean you have unlimited spending power. It’s important to know your card’s credit limit, which is the maximum amount you can spend on your card.

What is a credit limit and who sets it?

Your credit limit is the total amount of charges you’re authorized to make on a credit card.

It’s determined by your lender, which considers a range of factors, including your payment history, credit score, income and how much of your current credit limits you’re using.

If you are unsure where to find your credit limit on a new or existing credit card you can try looking in a few places, including your online account or monthly statement.

What is available credit?

Your available credit is the amount of credit you have left once you subtract your balance from your credit limit on any given card. For example, say your credit limit is $5,000 and you paid the balance in full last billing cycle. If you’ve spent $1,500 this billing cycle, you still have $3,500 “available credit” before you hit your limit. But it’s important to note that “maxing out” your credit card is not recommended.

If you pay off your credit card in full every month, the credit utilization for that card resets back to 0%. But if you don’t pay in full, you’ll need to keep your credit limit in mind so that you don’t suffer credit score damage or get into debt too difficult to recover from.

The 30% rule of credit utilization

Knowing your credit limit is important because it impacts your credit utilization, which is how much of your credit limits you are using. This is a major factor in your credit score, and it can affect your finances in a big way.

There is no downside to keeping your credit utilization ratio low; in fact, the best credit scores tend to go to people using very little of their limits. But if you use too much of your credit, you could be viewed by potential lenders as a higher risk, which could complicate the process of applying for things like a car loan or home loan. You can calculate your credit utilization per card or overall.

A good guideline is the 30% rule: Use no more than 30% of your credit limit to keep your debt-to-credit ratio strong. Staying under 10% is even better.

In a real-life budget, the 30% rule works like this: If you have a card with a $1,000 credit limit, it’s best not to have more than a $300 balance at any time. One way to keep the balance below this threshold is to make smaller payments throughout the month.

Increasing your credit limit

Credit limits don’t always stay the same across the life of your account since your finances will also change over time. It’s smart to assess whether or not it’s a good time to ask for a credit limit increase. You might be primed to ask for a credit increase if you’ve recently gotten a raise, have good credit or have a proven track record of making payments on time.

Pros of a higher credit limit:

  • A higher credit limit offers more flexibility in your budget.

  • An increased credit limit will shrink your overall credit utilization ratio if you don’t stack up a balance. And lower utilization will help your credit score. Calculating that ratio before you start the conversation is a good idea.

Cons of a higher credit limit:

  • An increased credit limit allows you to spend more and potentially rack up debt that is difficult to pay off.

  • The credit check often used to confirm eligibility could ding your credit score. Ask your card issuer if it will bump up your limit without a hard inquiry on your credit.

Once you have weighed the benefits and potential pitfalls and made your decision to move forward with the request, you can request a credit increase through a few avenues. The easiest way is to simply ask, usually through your online banking portal or by phone.

Aside from keeping a close eye on your credit utilization so it doesn’t go above 30%, there are other ways to manage your credit to make sure it’s healthy. Paying your bills on time is essential to keeping your credit score strong, and setting up automatic payments is one strategy that can help. Mixing up the kinds of credit you have, paying attention to the average age of your accounts (a long record of responsible credit usage is a good thing!), and spacing out your credit applications are things to keep in mind if you want to keep your credit healthy.

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