How Credit Card Limits Are Set
The purpose of the credit card is to serve as a tool which allows the user more flexibility
in making purchases; it is a line of credit with specific repayment terms. A fundamental condition of a credit card is the credit limit the maximum balance that can be held at any one time. This article will discuss credit limits, and how best to work within your credit limit.
It can sometimes be forgotten that the credit card does not increase your purchasing power per se, but is merely a tool which allows you to more effectively leverage your purchasing power. Though a card can be charged up to its limit, unrestrained spending can lead one into credit card debt or other problems. On the other hand, there are benefits to using the credit card responsibly. While an increased card limit may be dangerous for free spenders, responsible users can enjoy the benefits of higher credit card limits
First, let's get an idea of how your credit card limit is determined. Your credit card company will periodically review certain cardholder accounts and consider the user's spending and payment habits in determining whether to change the credit limit (or any of the other conditions associated with the account).
Some factors that go into the credit card company's review process include:
- whether you pay the minimum every month or pay in full
- how quickly you pay each bill
- how long you have been a cardholder, and how long it has been since your last limit increase
- how often you use your credit card
- how close you are to your credit limit
- your consumer credit report
The different grades of credit card, from basic, to silver, to gold, up to platinum, also affect your credit limit. As a rule, higher grades of credit card come with higher credit limits. On occasion, a credit card company may upgrade a credit card in order to give a cardholder a higher credit limit.
An important guideline is to be aware of how close you are to your credit limit, lest you go over it. As you approach your credit limit, you not only lose some of the flexibility the card offers, you can lose points with your credit card company. Your interest payments certainly increase as you use a greater fraction of your card limit, but you may also find your interest rate rising as well.
It may be helpful to keep a log of your credit card purchases, just as you do with your checking account. Keeping this log handy can help a responsible cardholder to ensure that there is enough money in his or her checking account to cover that month's charges.
When determining how close you are to your credit limit, it is vital to include upcoming finance charges. You may make a transaction which you think will put you just within your credit limit, only to find that your next finance charge pushes you over it.
Cardholders who pay on time, and pay more than the minimum, are more likely to be rewarded by the credit card company with higher credit card limits, lower interest rates, or other benefits. A good payment history indicates to the credit card company that this customer is a responsible person, and capable of handling his or her credit card well.
One who has a good understanding of his or her credit card, and is a responsible cardholder, is rewarded with a useful financial tool and favorable terms. The information above may help you to better manage your credit card, and make the best use of this tool at your disposal.
How Credit Card Limits Are Set
By: Pamella Neely
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