Understanding your credit limit and how you can or should use it will help you better understand your credit rating.
If you’ve ever had a credit card or used a line of credit with a bank or financial institution, you already know that you have a limit of how much you can spend. This is called your credit limit. But what is it exactly? A credit limit is defined as the total maximum amount a lender will give to you to spend on your credit card or line of credit.
Knowing your credit limit and reaching it are two different things. It’s not always a good idea to go up to your credit limit. Learning how to manage your credit responsibly is a key way to build a stronger credit history and rating. It will also make you more attractive to a lender or financial institution in the future.
How Do I Find Out What My Credit Limit Is?
If you have a credit card with a bank, they will typically tell you your credit limit on every statement. It’s also ordinarily available online through their mobile app or online portal. You can also call your credit card provider using the number on your statement or the back of your card to find out your limit.
How Does A Bank Work Out What Your Credit Limit Is?
As part of being a responsible lender, a credit card provider determines your limit. They want the limit to be low enough that you won’t spend more than you can pay back but they want it to be high enough that you’ll use the card. They want a credit card to be useful when you need it most.
To determine what that limit is they will consider the following:
- Your monthly income
- Your current credit score and history
- Your debt as a percentage of your current income
- Limits you have on other credit cards
Different types of credit cards are also available that impact your credit limit. Limits on some cards are the same for virtually everyone. Other cards have a range of credit limits depending on the range of factors we’ve listed above.
Why Does My Credit Limit Matter To A Provider?
A large part of your credit score is calculated by how much of the total credit you are using. This means that the limits and the balances from every credit card you currently use are considered. These factors all determine what your credit score is.
Another reason you want a good credit score is to get financing on big purchases like a car house or even home repairs. Some jobs even consider your credit score when determining your eligibility for the role .
On average a lender prefers that you use less than 30% of your available credit limit. For more information, visit how does a credit card work.
Credit Limit Example:
Based on your income, credit score and checks carried out by the credit card provider, they establish that you can have a credit limit of $3,000 per month to spend – and you need to pay this in full at the end of each month to avoid being charged any fees.
How Close Are You To Your Credit Limits?
Your credit score can benefit from using a smaller percentage of your available credit and paying on time. Experts recommend using at most 30% of your available credit on any card. You can check your current standing with our calculator.
What Does A $5000 Credit Limit Mean?
A $5000 credit limit means the maximum amount of money you can borrow on your credit card is $5000. It is the total amount of credit that the credit card issuer has approved for you based on your creditworthiness, income, and other factors.
It’s important to note that a credit limit of $5000 doesn’t mean you have $5000 in available funds to spend immediately. The available funds will depend on your current balance and any pending charges on your credit card.
Managing your credit card responsibly and not exceeding your credit limit is crucial to avoid penalties, fees, and damage to your credit score. Additionally, keeping your credit utilization ratio (the percentage of your credit limit that you’re using) low can help improve your credit score.
What Is A Normal Credit Limit?
A “normal” credit limit can vary widely depending on many factors, such as the credit card issuer, the creditworthiness of the cardholder, and the type of credit card.
Credit limits can generally range from a few hundred dollars to tens of thousands of dollars. According to a recent study by Experian, the average credit limit in the US is $31,015, but this can vary depending on the state, credit score, and other factors.
However, a “normal” credit limit can also depend on the individual’s financial situation and credit history. A credit limit of a few thousand dollars may be typical for someone with a limited credit history or a lower credit score. On the other hand, for someone with excellent credit and high income, a credit limit of tens of thousands of dollars may be standard.
Ultimately, the credit limit is determined by the credit card issuer and is based on various factors, including creditworthiness, income, employment status, credit history, and other financial information.
Should I Pay Off My Credit Card In Full Or Leave A Small Balance?
Paying off your credit card balance in full every month is generally recommended, rather than leaving a small balance.
When you carry a balance on your credit card, you accrue interest charges on the remaining balance, which can quickly add up and become expensive. By paying off your balance in full every month, you can avoid paying interest charges and reduce the amount of money you owe.
Additionally, paying off your credit card balance in full every month can positively impact your credit score. Credit utilization, which is the percentage of your available credit that you’re using, is an important factor in determining your credit score. By paying off your balance in full every month, you keep your credit utilization low, which can help improve your credit score.
Leaving a small balance on your credit card may not necessarily hurt your credit score, but it can result in unnecessary interest charges and fees. Therefore, it’s generally best to pay off your credit card balance in full monthly if possible.
How Much Should I Spend If I Have A $1000 Credit Limit?
Following the 30% rule is recommended to maintain a healthy debt-to-credit ratio, which suggests using a maximum of 30% of your credit limit. Ideally, keeping the balance under 10% is preferable. In practical terms, if your credit limit is $1,000, you should avoid exceeding a balance of $300 at any given time.
As best practice it’s always a prudent idea to keep the balance of your credit card as low as you possibly can in relation to your total credit limit. The very best practice is to pay off your entire balance in full at the end of each month. If you’re unable to pay the full balance then paying as much over the minimum as you can will reduce the interest payable on your credit card in the future.
Did you know?
The size of your credit limit compared to your outstanding money is called your credit utilization rate. In fact it’s the second largest factor after your history of payments in calculating your credit score. One of the easiest ways and often overlooked to raise your score is by simply lowering the percentage of your usage of credit limit. The easiest way to do this is by paying down your balances owed or seeing if your credit card issuer can increase your limit.
Calculate Your Credit Utilization Rate
Example Credit Utilization Calculations
$400
is
40%
of
$1,000
30%
of
$1,000
is
$300
$600
is
60%
of
$1,000
50%
of
$1,000
is
$500
What If I Go Over My Credit Limit?
Spending too much money with your credit card can have negative consequences. There’s a number of ways that you may be impacted financially which can include decreasing your credit limit, adding overcharge limits to your balance or even removing your credit card. Lenders will sometimes let you get away with this by charging fees but in extreme cases you can lose your credit card. In some cases your interest rate might also be increased if your credit history indicates that you consistently go over the limit set by your credit card. This could also mean that your credit score is impacted negatively. This is why it’s crucial to know and be conscious of your credit limit when making daily purchases.
Why Did My Credit Limit Go Up Or Down?
It is common practice for credit card issuers to review how you’re using your credit cards and then change your credit limit accordingly. There are several common reasons why your credit limit might have gone up or down.
Increases
- You regularly pay on time.
- Use your existing credit responsibly.
- Your income increases.
- You request and receive an increase in your credit limit.
- Your credit score increases.
Decreases
- Your debt has increased
- You only occasionally use your card
- You regularly miss payments
- Your credit history and, therefore, your credit report is incorrect
- Your identity has been stolen
