Importance of Understanding Credit Card Limit

Credit cards are one of those financial tools that can be utilized for good or evil, depending on how you use them. The first step in using your credit card appropriately is to understand how it works and what your credit card limit is. This limit will have a large impact on your credit score and your ability to make various purchases throughout your life.

What is Your Credit Card Limit?

When you obtain a credit card, the provider will establish a credit limit. This limit determines the maximum amount of money that you can rack up on your credit card. The credit limit is going to vary greatly depending on the applicant and issuer. According to the experts at SoFi, “If you have excellent credit and a history of paying off credit cards, your spending limit could be over $11,000!” This is simply because those with a higher credit score are considered more trustworthy to pay the funds back than those with lower scores.

How Does Your Credit Limit Affect Your Credit Score?

Your credit limit and how much of those funds you borrow are going to have a big impact on your credit score. In fact, about 30% of your entire credit score is dependent on how much money you owe in comparison to your credit limit. This is known as credit utilization, and it’s calculated by taking the total amount of credit you have charged up and dividing that number by the total credit limit that you have.

For example, if you have $300 charged on your credit card and it has a credit limit of $1,000, then your credit utilization is 30%. Most credit bureaus want to see that you’re charging 30% or less of your entire credit limit to maintain a good credit score. They perceive borrowers with high credit utilization ratios as risky. Therefore, the credit bureaus give these borrowers a bad credit rating.

How Much Should You Charge to Your Credit Score?

Determining an answer to the question of how much can you spend on a credit card starts with knowing your credit limit. Take your credit limit and multiple it by .3 to determine what 30% of your credit limit is.

However, if you pay off your credit card entirely each month, then you can charge up to the full credit limit. This is because if you pay the entire debt before the due date, your credit card company will report that you have a $0 balance. You’ll maintain a 0% credit utilization ratio on your credit report, which will keep your credit score from being reduced due to your credit utilization ratio.

As a credit card user, it’s crucial that you fully understand how your credit card works. Not only will it affect how much interest you pay, but it can have a big impact on your credit score.