Your credit limit is the maximum balance you can have on your credit card or line of credit without getting penalized for it. A line of credit or credit card is a flexible loan that you can get from authorized lenders, credit unions, and banks. Making sure you manage your credit well helps you stay debt-free and build a good credit history and score.
Your credit history & score play a significant role in determining your credit limit. For example, someone with an excellent credit score & a record of repaying on time may get a credit limit of $20,000, while someone with a bad credit score might get $6,000 from the same lender. Hence, managing your credits well & ensuring you don’t get penalized for exceeding your credit limit is very important. Here’s everything you should know well about managing your lines of credit.
How Do Credit Limits Work?
The lender determines your credit limit when you apply for a line of credit or credit card. To assign a limit, they check your credit history, credit score, monthly income, types of credits, and how much debt you currently have. For example, someone with very low credit may not get approved for a credit limit or be offered a low credit limit. However, some lenders provide a bad credit line of credit without any discrimination.
If you have a good track record of paying off all the credits & debts, you will have no trouble getting your loan approved. If you are good at repayments, you might even be able to increase your credit limit by request. Sometimes lenders even offer pre-approved limit increases when the credit user has been paying off the repayments on time and previously had a good credit history.
How Much Credit Limit Can Or Should You Use?
Should you use your credit completely, or is there an ideal amount that you should spend to maintain a good credit record? Technically, you can use the entire amount available on your credit card, making purchases up to your limit. However, if you try to exceed your credit limit, your transactions will be declined unless you have previously opted to have over-the-limit transactions on your card.
If you have opted-in for over-the-limit transactions, you would be required to pay a fee that could trigger a penalty. A penalty would mean your lender can charge you a higher penalty rate than what you previously paid under certain circumstances.
While signing the agreement, you should always check out the penalty rates to avoid any trouble later on, as every lender & bank has different rates.
How Do Credit Limits Influence Your Credit Score?
Your credit usage & limits have a significant influence on your credit score. Each month, your credit history gets reported to all the credit bureaus, and each updates their record of you based on the information they have received. The statement also considers your credit utilization, which affects your score by 30%. Ideally, your monthly credit usage should be 30% of your credit limit.
If you spent over 30% for a particular month, try to balance it out in the next month. Using more than 30% of your credit limit frequently would affect your credit history & score.
Credit limits are nothing to sweat about if you have an excellent record & score. However, if you have an average or bad score, you can still get a credit approved by a few lenders as long as you can assure them you will pay it off completely. There are even alternatives to credit cards or lines of credit that you could look into if you have a bad credit history and are struggling to get a loan approved.