What's A Good Limit To Have On Your Credit Card?

Even though credit cards get a bad reputation for things like APR rates and debt potential, they can actually be incredibly useful when it comes to your personal finances. From earning cash back and rewards to helping build and repair your credit score, credit cards can do just as much good as bad depending on the user. Among the many important factors to consider with credit cards is your spending limit. These limits can not only be a good way to determine how your existing credit history appears to lenders, but can also be an important way to budget your spending.

The basic thing to remember about your specific credit limit is that this amount is the maximum that your lender will allow you to spend with a given line of credit (like a credit card). It's also important to remember that available credit is not the same as your credit limit. For instance, making a purchase on your credit card will not change your credit limit, only how much available credit is left for you to use. Having a higher or lower limit can also be indicative of your personal financial needs. Whether you are looking to make large purchases or reign in your spending, your optimum credit limit will be specific to your individual finances and, more importantly, your long-term financial goals. With that in mind, it can be important to understand how these limits are determined and how to best make your limit work for you.

How are credit limits determined

People with good credit and a reliable payment history are typically more likely to qualify for higher credit limits than those with lower scores or less consistent histories. With that in mind, there are a multitude of factors that can go into how a lender determines your credit limit including everything from employment status to existing monthly financial obligations to credit scores. While a higher credit score is more likely to ensure you qualify for better options, lower credit is not inherently disqualifying. In fact, regularly paying off your credit card can be an important factor in improving your overall credit — so if you're offered a higher than normal APR (due to existing credit imperfections) it can be worth using to prove your reliability to a lender.

It's also important to remember that your credit limit is not permanent. Through either a lender-initiated or customer-initiated process, your credit limit can be increased. While individual lenders will have their own specific criteria for determining a customer-initiated request, many lenders will periodically re-evaluate customers (particularly their payment history) and offer lender-initiated increases if they like what they see. Of course, having a lower credit limit can be important for users who might need help reigning in their spending. For some, the temptation to spend with a higher limit can be problematic so making sure to look into your lender's limit options is important. Remember you can always decline a credit limit increase if it is offered to you.

Making your credit limit work for you

There can be serious benefits to having a higher limit on your credit card, especially if you are a responsible spender. Higher credit limits can make it easier to make any larger purchases you might have planned, or can serve as a way to handle any emergencies that might surprise you. A higher credit limit can be especially useful when it comes to your credit utilization ratio. This ratio is calculated by comparing the amount of credit available to you against the amount of credit you've used. Since most lenders prefer a ratio that falls below 30%, having a higher limit can help to offset any spending you might regularly use your credit card for. As an added bonus, keeping your credit utilization low can also help to improve your credit score.

Speaking of credit scores, it's also important to be mindful of your current credit when considering a credit increase. Since some lenders require a full hard credit pull for customer-initiated credit increase requests, it can actually be more beneficial to wait for a lender-initiated increase instead. This can save you from having a hard credit pull on your credit report (which can and does lower your credit score). Similarly, if your existing credit limit is increased, you more than likely won't be shopping for a new credit card. This can save you from yet another hard credit pull which typically happens when you apply for a new or different credit card.