Once you understand the question – What is a credit limit? – and how to use it, you can see how it works. More importantly, you understand how it is related to your credit rating. A credit limit is the largest amount of money or credit that an institution (i.e. bank or short-term loan lender) would give to you in the form of a line of credit or short term loan.
If you’re like most people, you’ve had a credit card. Perhaps you’ve even used a line of credit from your bank or some other financial institution. So, you know that those groups set a limit of how much they will give you or how much you can spend. This is essentially your credit limit.
Got it? To put it in other terms, it’s the amount of money or the amount of credit you are given. It affects how many charges you can make on that account. Or it’s the total limit amount you’re allowed to put onto your credit card. It’s also the total amount that a lender lets you spend on your line of credit.
Don’t Go for the Maximum
So, knowing what your credit limit is, how high it’s set, and reaching it are two entirely different things. Going all the way up to your credit limit isn’t always such a great idea. So, it’s good to understand how to manage your credit. Handling it properly can help you build the best credit history and credit rating that you can get. This in turn makes lenders and financial institutions more likely to lend to you in the future.
How Can You Find Out Your Credit Limit?
Now that you have the answer to What is a Credit Limit? you’ll better understand banks and their limits. If your bank has given you a credit card, your limit should be printed on every statement. If not, you can usually find it online, through the bank’s mobile app or online banking portal.
Finally, you could call your credit card provider. Their contact details will be on your statement or on your card’s back. One of those sources should reveal your limit.
How Do Banks Decide What They’ll Give You?
Credit card lenders who act responsibly set credit card limits based on the information that they have to hand, i.e. your credit history. They don’t want you to spend more money than you can pay back. But, they do want you to have to enough credit so that you use their card. That’s how they make money. Bottom line, they want the card to be useful to you where you need it and when you need it most.
Factors They Consider When Setting Your Limit
- How much you make each month.
- Your credit score right now
- A history of any debt you’ve had or currently have
- What percentage of debt you’re carrying compared to your current income
- What other credit cards you have and current limits set on those
Those factors listed above determine your credit score. Sometimes you’ll find that the credit limit is exactly the same for everyone. But, usually, consumers with great credit scores and great credit history will get a much larger initial credit limit.
Good Credit Scores Help Other Areas too
There are many good reasons to have a good credit score. Better scores help you get financing on the big on things you want to buy – important things like a new car or even a house. If you’re applying for jobs, sometimes your potential employer will look at your credit score and use that as a factor to determine your eligibility for the job.
Your Percent of Limit Used
When lenders are looking at your credit limit and the amount you use, they prefer that you use less than 30% of the available limit set for you.
If you are carrying a balance on your credit card, try to keep it as low as possible compared to the credit limit that’s been set for you. For best practices, pay your full balance at the end of every month.
If that’s not possible, then at least pay as much over the minimum payment that is set on your card statement each month. This will help you helps reduce the interest that you’re paying on your credit card