Your credit limit is the highest total balance you’re allowed to spend on a credit card. If your credit limit is $2,000, for example, you can’t have a balance exceeding that amount. If you hit your limit, otherwise known as maxing out your credit card, the lender won’t offer you more credit until you pay some back. Studies have shown that about half of people have maxed out their credit cards.
It’s wise to understand how card issuers set credit limits, as this can play a key role in your finances.
How Do Companies Decide on Your Credit Limit?
There are several factors that go into determining your credit limit. In an ideal world, lenders want to let you borrow more money. But they also know that the more they let people borrow, the greater the chance becomes of them not getting repaid. Credit limits are a way for credit card companies to walk a line between allowing cardholders to spend, but not giving people too much so that they overspend.
These are some things that play a role in deciding your credit limit:
- The credit card and card issuer; every card and credit card company is going to have different terms.
- Your income is going to play a role in how much you’re allowed to borrow. Lenders are going to have more confidence that people who make a lot of money will be able to pay them back.
- Debt-to-income ratio is a key element to determining credit limit. This is exactly what it sounds like: how much debt you have relative to how much you earn. People with big incomes can also have large debt loads, which would look worse to lenders than someone with a modest income and low debt.
- Your credit report and credit history are going to influence your credit limit. If you’ve had trouble repaying loans in the past, lenders aren’t going to want to give you a high credit limit.
What Happens When You Max Out Your Credit Cards?
No one wants to think about the possibility of maxing out their credit cards. However, this is something that can happen to anyone if they’re in a tight position. When you’re struggling to pay off your debt, you should consider looking for outside help.
Debt relief is one avenue to consider. But it’s essential that you choose a debt relief agency that has your best interests at heart. Many Freedom Debt Relief reviews come from consumers who found themselves drowning in credit card debt, then used settlement to get a handle on what they owed. Many people find they can eliminate their balances in as little as 24-48 months using this strategy.
Not being able to repay your debt can be a scary thing. It leads to collection calls. And eventually can force an individual to file for bankruptcy. If you’re nearing or hitting your credit limits but are unsure how you’ll pay down your balance, explore your options for debt relief. Speaking with a credit counselor is a good place to start.
Why Is Credit Limit Important?
Your credit limit matters because it dictates how much you’re able to buy with credit. Furthermore, if you have a low credit limit, you’re going to have to pay closer attention to your credit utilization ratio.
Your credit utilization ratio is important because it’s one of the major factors used to determine your credit score (about 30 percent). This is actually the second-biggest determinant behind payment history. Credit utilization is simply the amount of credit you’re using divided by your credit limit. When this number is too high, it might signal that you’re spending too much. Simply getting approved for more credit, without actually using it, can help lower your credit utilization.
It’s important to understand your credit limit. Failing to account for this can lead to you maxing out your cards or harming your credit in other ways.
