What First Time Card Holders Need To Know About Their Credit Limit

Are you looking to apply for your first credit card, or want to open up an additional credit card account, and have questions about your credit limit? If so, you have come to the right place. 

In this article, I am going to go over the basics of what a credit limit is, how it impacts your personal finances, and how you can increase your credit limit.

It may seem like a simple number, but there are a lot of factors to discover if you want to learn more about how credit limits impact you. 

What is a Credit Limit?

In order to discuss the details around your card’s credit limit, we have to first establish a definition. A credit limit is essentially the amount of money a credit card company or other financial institution is willing to lend you. 

Consider it like a game of risk: the company you are borrowing credit from by using your credit card is taking a gamble as to whether or not you will be able to pay that money back in your monthly credit card statements.

So, they consider factors like your loan repayment history, income (and the minimum monthly payment you can likely afford), and credit rating. Creditors will also use consumer analytics to compare your situation to previous data to determine your level of risk as a borrower. 

Once the creditor has a better understanding of your credit history, they will determine you as a low-risk borrower and award you a higher credit limit, or as a high-risk borrower and set you at a lower credit limit.

This decision is made to protect the financial institution from taking any losses if you are unable to pay back any amount of money that you owe them. 

Remember as well that this credit limit assessment is an ongoing process. Creditors perform frequent reviews of cardholder accounts to determine whether or not they should increase or decrease an individual’s credit limit.

This means that you need to be diligent about maintaining your budget and paying off your credit card bills on time, in order to avoid a decrease in credit limit, and to benefit from improving your overall credit score. 

What Does it Mean to Pay Credit Off?

What First Time Card Holders Need To Know About Their Credit Limit

When you pay your credit off, it means you are paying the money that you owe (debt) back to the credit card company. 

A common myth is that it is beneficial to carry a balance on your credit card, but this is untrue. It is always wise to pay off your credit as soon as you are able to, and before the money is overdue.

This prevents you from incurring interest charges and timely, regular payments keep your credit score up.   

Another factor you want to consider when it comes to paying off your credit is your credit utilization ratio.

This number represents that amount of money you are borrowing in comparison to the amount of money you have available to you through your credit limit; it is expressed as a percentage. 

The lower your credit utilization ratio (meaning, you have a high credit limit that you only borrow a small portion of), the better your credit score will be.

The key takeaway from this is that you should never imagine your credit limit to be the amount of money available to you: always budget to borrow less than that, and pay it off in full. 

You also have the option to make minimum payments on your credit card, but this can quickly add up due to interest.

Each time you opt to make a minimum payment, the balance will roll over to your next monthly bill, and now it will have interest added to it. 

Be aware as well of compounding interest, which can make interest on outstanding credit card balances quickly rack up. This further impacts your credit score and puts you at risk of owing late fees. 

Paying credit off in a timely manner can also prevent you from borrowing over your credit limit, or “maxing out” your credit card.

If you do happen to borrow more than your allotted amount, you can face a variety of consequences, including having the over-limit amount added to the minimum payment you owe the creditor, getting charged an over-the-limit fee, or having your account frozen until you pay the debt that you owe. 

All of these scenarios impact your credit report and will make you a higher risk to borrow the next time you apply for a line of credit.

How Can You Increase Your Credit Limit? 

Are you looking for a higher credit limit than you already have? Here are a few ways that that number can increase over time:

1. Credit limits can increase automatically

As I mentioned, creditors monitor people’s accounts to find out who is eligible for a higher credit limit.

If you have a low credit utilization ratio and pay the entirety of your credit card bill each month, it is likely that a credit card company will reach out to you with an offer for a higher credit limit.

2. Ask for one

You are able to request a credit limit increase either through a phone call or online depending on your financial institution.

Be prepared to share the reason for your request, and you may be asked to share your income information to confirm you can afford a higher limit.

3. Open up a new credit card

This can be an effective strategy to increase your credit limit, or it can quickly become a slippery slope if you are using credit cards to spend above your means (this is not the route to take if you are in a financial emergency, either).

On the other hand, if you do find your personal finances growing, you might decide to upgrade your card. Different cards to consider when opening up a new credit card with in intention of growing your credit limit include:

Student Credit Cards are a great choice for people who want to begin developing their credit history while they are still in college, but be prepared for a lower credit limit because students are generally considered more high-risk borrowers (as they often have little to no personal income). The credit limit on student credit cards ranges from $300 to $3,000. 

Low Limit Credit Cards are a smart option for people who are still growing their finances and do not want the temptation of having a large amount of credit within reach.

They can also be a wise choice for people who have just finished paying back previous debts and are starting to rebuild their credit again.

For first time card holders, you are generally offered a credit limit between $500 and $1,500, but of course this depends on your individual finances.

Keep in mind that any card can be a low limit credit card if you are worried about spending above your budget; simply call the credit card company after you are approved and request the limit to be decreased.

High Limit Credit Cards are the choice for people who earn a higher income and are limited to people with good or excellent credit.

So yes, before you are able to access these high limit cards, you must focus on building and maintaining a good credit score.

On this end of credit cards, you are looking at a credit limit of between $5,000 and $100,000 depending on what you are approved for. Keep in mind that many of these premium cards also come with an annual fee. 

The Bottom Line

When it comes to credit, everything is connected. Your credit limit is based on your credit history, your credit history helps determine your credit score, and in order to maintain a good credit score you must borrow within your credit limit and pay it back in a timely manner.

It might seem overwhelming at first, but once you grow your personal income, become familiar with budgeting, and ensure you are spending within your means, you will see your credit limit grow. 

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