Credit Card Limit: Are You Getting What You Deserve?

In this credit cards 101 type post, I thought I'd share what I know about your credit card limit.

What is a Credit Card Limit?

When you are issued a credit card, you are assigned a credit card limit. This is the highest balance you can spend on the card. Anything spent above this amount will incur an above-the-limit fee. Your initial credit card limit is based on your income and credit history.

Cards Without a Limit

Charge Cards Like the ZYNC from American Express(sm) Have No Pre-Set Limit

Some credit cards do not come with a limit. American Express charge card, for instance, don't allow you to carry your balance forward. For that reason, you don't really have a limit on your spending within the month. After all, you'll be paying it all off. What do they care how much you spend. However, I've heard that although there is no stated, pre-set limit, you will receive a notification when you've reached a “soft” limit, based on your history of spending with the card.

Why Your Credit Card Limit Was Lowered

As a response to the recent “credit crunch” the financial world felt, the credit card companies began lowering credit card limits. You may have experience this last year. Some consumers felt as if this was done without merit to their accounts. My limit was lowered on a card I wasn't using. I wouldn't care except I know it affects my credit score. Here's how…

How a Credit Card Limit Affects Your Credit Score

One of the factors involved with calculation your FICO credit score is your “amounts owed”. This is judged based on the amount owed compared to the amount available. Therefore, if you have a high credit card limit, any balance you carry will pale in comparison to your high limit. It's recommended that you keep your balance to 25% of your overall limit. Having a higher limit will help your credit score. For this reason, charge cards, which might report a limit of $0, are often considered bad for your credit score.

How to Raise Your Credit Card Limit

Considering the effect the credit card limit has on your credit score, you might want to try and raise it to it's highest level. Credit card companies will naturally raise your limits over time as your payment history builds up. But you can also call them and request a credit limit increase. Make sure you ask them to only do a “soft pull” of your credit history. Some online portals allow you to do this as well. Takes just a few minutes and could really help your score.

Do you have a recent experience dealing with your credit card limit? Share it in the comments below…

About Philip Taylor

Philip Taylor, aka "PT", is a former practicing CPA, blogger, podcaster, husband, and father of three. PT is also the founder and CEO of FinCon, the conference and community dedicated to helping other financial influencers and brands. He created this website back in 2007 to share his thoughts on money, hold himself accountable, and to meet others passionate about moving toward financial independence.

PT uses Personal Capital to keep track of his financial life. This free software allows him to review his net worth regularly, analyze his investments, and make decisions about his financial future.

PT keeps a portion of his emergency fund in Betterment, the automatic investing tool that makes investing super simple. Betterment focuses on what matters most: savings rate, time in the market, investing costs, and taxes. PT recommends this service to anyone looking to get started investing for themselves.

All the content on this blog is original and created or edited by PT.

Comments

  1. @James – that’s an interesting approach. it shows that personal finance is truly personal. you should do what works best for you.

  2. every so often i get a notice saying my credit limit has been increased and i call them up right away and tell them i don’t want my limit increased.

    i personally feel my limit is high enough and just because they want me to spend more i don’t see a need to do so.

    find a limit that works for you this way you can buy what you need but you don’t get out of control.

  3. Oops on my comment above.

    I meant that it’s a script to increase your credit card limit and lower your interest rate. We learned it at a Rich Dad Poor Dad seminar.

  4. A good idea is to use other methods besides just a credit card. Debit cards should be used for smaller, more maneagable purchases so that you can keep your credit cards open for emergencies and you can keep that balance near 25% of the overall limit.