4 Common Myths about Credit Limits: Know the Truth for Wise Credit Card Use
Although the definition of credit limit is straightforward--it's the maximum amount you can borrow on an account--a variety of misunderstandings surround the concept.
Here are four myths and what you should know to manage your credit cards effectively:
Myth No. 1: My credit limit is my spending limit.
Actually, your credit card spending should fall well below the credit limit. Most experts advise keeping credit card balances to 10 percent or less of credit limits. Using too much of your available credit hurts your credit score.
Myth No. 2: An increase in my credit limit means I can afford to charge more on my credit card.
Your credit card company might raise your credit limit after you've paid your bills promptly over a period of time. At that point, the issuer sees opportunity to make more money. The higher the balance you carry, the more interest the credit card company earns.
Don't interpret a credit limit increase as permission to go on a spending spree. Your spending should fall in line with your long-term financial goals and monthly budget.
Myth No. 3: My credit limit has nowhere to go but up, especially if I pay down my credit card debt.
Many consumers learned this was untrue last year as credit card companies slashed limits in a reaction against previous over-lending. In some cases, consumers whose credit limits were cut were doing all the right things--paying their bills on time and paying down large chunks of their debt. This is one change that credit card companies can make without providing advance notice.
Myth No. 4: I'm stuck with my credit limit.
You can ask for a higher credit limit by calling your credit card company, and you just might win if you can show your financial circumstances have improved. You can also opt in for a program that allows you to go over the limit, but you must pay a fee. Before new federal credit card regulations kicked in, many companies were letting their customers go over their credit limits and then charging fees for the privilege. Now they must get customers to opt in for such programs.
View credit limits dispassionately. Don't let dampened credit limits get you down, and don't let high credit limits go to your head. Use your head instead to set your own reasonable spending limits.
Published 08/09/11 (Modified 01/25/13)