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A credit card limit is the maximum you can spend before a repayment is required. For those who pay their balance on time to avoid interest and fees, a high limit provides valuable spending power. However, for those who view it as permission to overspend, it can lead to financial trouble.
While you can request an increase, issuers often grant them automatically to cardholders who manage credit well. But is a higher spending limit always a good thing? It depends on your financial situation. Here’s how to know if your credit card spending limit is too high.
Key Points
• A high credit card spending limit can positively impact your credit by helping to lower your credit utilization rate.
• Increased spending limits offer a larger financial safety net for unexpected and emergency expenses.
• The primary drawback of a high credit limit is the temptation it provides to overspend and accumulate high-interest debt.
• Credit card issuers may automatically increase your limit based on factors like improved credit history and income.
• If a high spending limit causes you to carry a large balance you can’t pay off, you may want to consider lowering it or seeking debt consolidation.
How Does My Credit Card Spending Limit Work?
Credit cards are a form of revolving debt, which means that there is an upper spending limit. However, the credit can be repaid and used again. It revolves between being available to use, being unavailable because it’s being used, and being available to use again after it’s been repaid.
A credit card issuer typically bases the credit limit on factors such as the applicant’s credit score, income, credit history, and debt-to-income ratio. However, every credit card company differs in which factors it considers and how much emphasis it places on each component. The current average credit card limit is around $30,000.
It’s important to keep in mind that a credit limit represents the maximum you can spend, not a recommendation for spending. In fact, a good rule of thumb is to spend no more than 30% of your available credit to maintain healthy credit. Many financial experts suggest aiming even lower — closer to 10%. “Generally, the further away a person is from hitting their credit limit, the healthier their credit score will be,” says Brian Walsh, CFP® and Head of Advice & Planning at SoFi.
Why Your Credit Card Issuer Increased Your Spending Limit
Your spending limit isn’t set in stone, though. Even if you haven’t specifically requested a credit limit increase, your credit card issuer may automatically increase the credit limit on your card.
There are various reasons this might happen.
• Your credit has improved, resulting in a higher credit score.
• Your income has increased.
• Your card offers a built-in pathway to a higher credit limit.
• The card issuer wants to retain you as a customer by offering a higher credit limit.
Credit card issuers may also increase customer credit limits to encourage responsible borrowers to spend more on their credit cards. Generally, the more cardholders spend on their cards, the better it is for the issuer’s bottom line.
Pros of a High Credit Card Spending Limit
Having a high spending limit on your credit card comes with a number of benefits:
• Emergency safety net. A higher limit provides a larger financial cushion for unexpected expenses, such as urgent home repairs, medical bills, or car maintenance, without needing to apply for a new loan.
• Lower credit utilization. Your credit utilization rate is the relationship between your spending limit and your balance at any given time. If your limit is $10,000, and your balance is $1,500, your credit utilization is 15%. Generally, the lower your credit utilization rate, the better (below 30% or closer to 10% is generally best).
• Better rewards. If you have a rewards credit card, having a higher spending limit enables you to put more of your monthly expenses on a single card, helping you accumulate cash back, points, or miles faster.
Cons of a High Credit Card Spending Limit
As attractive as the benefits might sound, there can be drawbacks to having a high credit card spending limit. Here are some to consider:
• Risk of overspending. The most significant drawback is the temptation to spend more than you can comfortably afford just because the credit is available.
• Potential for high-interest debt: If overspending leads to a high balance, the high limit can result in substantial debt and steep interest charges.
• Future borrowing risks: Some lenders may view a very high total credit limit as a risk when you apply for a loan (such as a mortgage), as it represents a large amount of potential debt you could incur at any time.
What Happens if You Go Over Your Spending Limit
Unless you’ve opted into over-limit coverage, you generally can’t go over your spending limit on a credit card. Any transaction that pushes you beyond your credit limit will simply be denied.
If you have opted into over-limit coverage, however, the issuer will allow you to spend beyond your limit but will typically charge you a fee. These fees generally run between $25 and $35 but, by law, can’t exceed the amount of the overage. So if you went over your credit limit by $18, the issuer can’t charge you more than $18.
Before you opt in to an agreement like this, the credit card issuer must tell you what the potential fees will be. They must also provide you with confirmation that you opted in.
If you opted in to an over-the-limit agreement, but no longer want it, you can opt out at any time by contacting your credit card issuer’s customer service department.
Recommended: Maxed-Out Credit Card: Consequences and Steps to Bounce Back
Taking Control of Credit Card Debt
A higher spending limit can be a good thing if it’s used responsibly. If it leads to over spending, on the other hand, you may find yourself carrying a high balance from month to month and racking up interest. If that happens, here are some strategies that can get you back on track:
• Pay more than the minimum: Look for ways to temporarily reduce or eliminate unnecessary expenses (like dining out or subscriptions) and put any savings you uncover towards paying down your balance.
• Look for a balance transfer card: If you can qualify for a 0% interest balance transfer credit card, you can avoid paying interest on your balance for a period of time (typically for 12 to 21 months), making it easier to pay off. Just watch for transfer fees, which often run from 3% to 5%.
• Consider a credit card consolidation loan: Taking out a fixed-rate personal loan with a lower interest rate than the card(s) you’re paying to pay off can help you save on interest and potentially pay off your debt faster. If you have multiple debts, a consolidation loan can also simplify repayment by rolling multiple monthly bills into one.
The Takeaway
A high credit card spending limit can be a beneficial tool, offering a financial safety net and helping to keep your credit utilization low, which can positively impact your credit. However, it only serves as an asset if you use it responsibly and avoid the temptation to overspend. If a high limit encourages you to take on excessive, high-interest debt, it may be too high for your current financial situation.
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FAQ
What’s the average credit card limit?
The current average credit card limit is around $30,000. However, credit limits can vary significantly based on factors like your credit score, income, and credit history. It’s important to remember that your credit limit is the maximum you can spend, not a suggested spending goal. Financial experts typically recommend keeping your spending, and thus your credit utilization rate, below 30% of your limit — and ideally closer to 10% — to maintain healthy credit.
Can a spending limit be too high?
Yes, a spending limit can definitely be too high for certain individuals. While a high limit is beneficial for maintaining a low credit utilization rate and offers an emergency cushion, it can also tempt people to overspend. If a high limit encourages you to carry a large, revolving balance and incur high interest charges that you struggle to pay off, then it is likely too high for your current financial habits and situation.
Is it bad to use 50% of your credit limit?
Using 50% of your credit limit is generally considered too high and can negatively impact your credit. This high usage translates to a 50% credit utilization rate, which is well above the recommended maximum of 30%, and far from the ideal 10%. A high credit utilization rate signals to lenders that you may be over-reliant on credit, financially overextended, and a higher risk of default.
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