Your credit card spending limit is a powerful number.
Your spending limit determines how high a balance you can carry on your credit card at any given time without receiving a penalty. It can dictate whether you buy that 2019 Lincoln Navigator you’ve had your eye on or settle for that 20-year-old minivan you found on Craigslist. It can decide whether you finally buy a ticket to Costa Rica or purchase a tank of gas for a road trip to the other side of town.
Spending limits can vary drastically. According to a report by the American Bankers Association, If your credit score is low and/or you’re opening your first ever line of credit, your credit card spending limit could be below $3,000 . If you have excellent credit and a history of paying off credit cards, your spending limit could be over $11,000!
You may be thinking that a higher spending limit is automatically better. After all, it can give you a lot more freedom to make big purchases. And nothing says “adulting” like a credit card company trusting you to pay back a ton of money, right?
But here’s the question—could your credit card spending limit be too high?
How Does My Credit Card Spending Limit Work?
If your spending limit is $10,000, you can rack up $10,000 on your card, no problem. But if you go over that amount before paying any of it off, that’s when the trouble begins.
Once upon a time, credit card companies would charge you an over-limit fee for going over your limit. Thanks to the Credit Card Accountability Responsibility and Disclosure Act of 2009 , it has become illegal for companies to charge you these fees in most cases. These days, if you make a purchase that would push you over your spending limit, your purchase will just be declined—which can be both inconvenient and embarrassing!
Some credit card companies also set a daily spending limit and/or cash advance limit.
As you might guess, the daily spending limit is how much you can put on your credit card in one day. Daily spending limits aren’t super common, but some companies use these limits to protect you if your card is stolen. This way, a thief can spend only so much money before you or your company realizes your card has been stolen and cancels it.
Your cash advance limit, or the amount of money you can access immediately through your credit card, can vary depending on your credit limit. You should know that if you increase or decrease your credit card spending limit, there’s a good chance your cash advance limit will be adjusted accordingly.
Credit card companies take a variety of factors into account when determining your spending limit—your credit history, your income, and your debt-to-income ratio are some of the factors that may come into play. However, every credit card company is different in what it considers and how much emphasis it places on each component.
Your spending limit isn’t set in stone, though. If you have a good history with your card company and your income and/or credit score has increased, it might be a good time to request an increase in your limit. Likewise, if you find yourself tempted to overspend with your high limit, you can request a decrease in your spending limit.
What do you think? Is it time to increase your spending limit? Or is your limit already too high for your needs and has you thinking about decreasing it? Being aware of the pros and cons of having a high credit card spending limit could help you decide on your next move.
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The Advantages of a High Credit Card Spending Limit
There are a few practical reasons for having a high spending limit. For example, it can be a lifesaver in an emergency situation. Let’s say you lose your job and are struggling to make ends meet until you find a new gig—with a higher spending limit, it would be possible to put a few big expenses on your credit card without going over the limit.
Or maybe you wake up one morning and realize your air conditioner is broken! Those babies don’t come cheap. You may choose to simply pay for a new unit with your card.
While this is technically possible, be wary of putting big emergency purchases on your credit card. You might consider saving a designated emergency fund that could cover three to six months worth of expenses. That way, you won’t have to rely on plastic and end up stuck with a credit card bill with interest. The average interest rate on credit cards is currently 17.73% —if a large purchase isn’t paid back at the end of the month, that is a huge interest charge!
If you’re responsible with your spending, having a high limit can lower your credit utilization rate. 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%. The lower your credit utilization rate, the better.
Why? Because your credit utilization rate can play a role in determining credit scores. In some cases, if credit utilization rate is kept low over time, it may have a positive impact on a credit score.
Frankly, we usually need fairly strong credit scores to accomplish major goals: renting places to live, buying houses, buying cars, buying phones. Not to mention, the higher your credit score, the lower your interest rate is likely to be on a lot of things… including your credit card. Yep, it’s a vicious cycle!
This means that putting $1,500 on your card with a $10,000 spending limit could be more useful than putting $1,500 on your card with a $5,000 limit. If you can make your credit card work for you instead of against you, the result could be a much more financially comfortable situation!
The Pitfalls of a High Credit Card Spending Limit
If your friend hands you one Oreo, you’ll probably eat it. If your friend hands you five Oreos, how many will you eat? Still just one… or all five?
Self-control is a tricky thing. If you have a higher credit card spending limit, there’s a chance you’ll be tempted to spend more than if your limit is low. That habit can quickly lead to an overwhelming amount of credit card debt.
If you’re the kind of person who would still keep your expenses low with a $20,000 limit, then congratulations—you might be able to make a high spending limit work for you! But if you’re someone who can get carried away with credit card spending, a high limit could end up making you a slave to your debt.
Remember, when you spend $1,000 on your credit card, you aren’t just spending $1,000. Don’t forget about interest! Interest rates on credit cards are notoriously high. As of mid-June, the national average credit card annual percentage rate (APR) was 17.73% . All of a sudden, that $1,000 could turn into $1,177.30 if the balance is not paid in full at the end of the month! The longer the balance is left unpaid, the more interest is accrued.
There’s no need to be ashamed about struggling with your spending. If we’re holding five Oreos, plenty of us would eat two or three (or five) instead of just one. The trick is knowing how to limit yourself and how to move forward if you do get yourself into a jam.
Taking Control of Credit Card Debt
Are you struggling with credit card debt? One possible option could be to consolidate with a personal loan.
With a credit card consolidation loan, all your balances are merged, so there is just one monthly payment—with one interest rate—instead of several. With a consolidation loan, you receive a new interest rate and monthly payment. This new interest rate could end up being lower than the rates on your current individual credit cards, which could save money over time.
When you take out a personal loan, it’s crucial to do so through a quality company that you trust. SoFi’s personal loans offer competitive interest rates and no fees, which can save you even more money. And if you lose your job, SoFi will pause your payments until you get back on your feet.
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