What is a Credit Limit and How Does it Affect your Credit Score
For anybody looking to hold their finances together, it is vital to understand the terms of money like borrowing, loans, credit, and debt. For students with loans, there is a chance they have used a credit card or have tapped into a line of credit; you probably know what a credit limit is. But what is it?
A credit limit can be defined as the maximum amount of money a lender will allow you to spend on your credit line or credit card. If you manage your credit limit responsibly, it will help you improve what you can borrow later. For example, as a student being lent money by credit providers, they will limit the amount you can borrow. Understanding what you are supposed to do helps build better credit scores and maximize your limit.
How is the credit limit determined?
The issuers of credit cards set credit limits such that it is high enough for you to use the card and how enough that you can't spend more than what you can pay. The credit limit is generally included on the credit card statement, or you can get it on your online account. Credit limits usually fluctuate based on the financial history of the user.
The type of credit card issued to you will determine the credit limit. The credit limit is set based on your credit score, credit history, and the details provided on your credit report. If you have a high credit score and possess a more positive credit history, your limit will be increased. On the other hand, little credit history leads to a low credit limit, and it will increase depending on how you are responsible for your borrowing.
Why does credit limit matter?
Having a good credit score will determine your financial ability, like purchasing a home or car or getting certain types of jobs. When calculating your credit score, the balance on your credit card compared to your credit limit is used as a factor for determining it. It is recommended that you keep your balance on your credit card low to increase your credit limit.
Why does the credit card limit change?
Credit card limits change depending on how you service your balances and the financial activity on your account. For example, if you make on-time payments, your income increases, your credit score increases, and your limit is increased by the creditor you gave the credit card. However, not making payments on time and you start using much of your set limit, you rarely use your card, your credit report has some errors, your identity is compromised, and your limit will likely be decreased.
What happens if you exceed your limit?
Exceeding the credit limit has its share of consequences. The lenders may charge overcharge fees on you, lower your credit limit, or in some cases, close your account if you do it regularly. Sometimes your interest rate may be increased if the history shows you exceed your limit regularly, and worst still, it will negatively affect your credit score. It means you should track how much you charge on your credit card.
How much can you use on the credit card?
As a rule, spending only 30% of your credit limit is advisable. It helps keep your credit utilization ratio nice and low, reflecting positively on the credit score. You may spend up to your limit, but it is not good if you want to keep your credit score. Also, paying your credit balance in full is best.
Requesting a credit limit increase is generally an excellent way to increase your credit score if done well. To learn more, visit our website nationalfcg for better credit and consultation services. We help you achieve proper credit by providing credit repair services.