To avoid being in such a situation, you should know your limits - where to stop and how to manage a credit card properly.
In 2016, average credit card debt in a household was about $16,048.
The average household with credit card debt pays about $1,292 in interest every year.
Everyone of us use credit cards; but, how many of us know what is meant by credit limit?
Do we have adequate knowledge about it?
Why and how to set your credit card limit
Let’s talk about the credit limit - why to set it, how to do it and whether or not to raise it; the knowledge will help us to manage our credit cards properly.
1 Why should you set your credit card limit?
It is set so that you can’t spend beyond your limit.
But, in most cases, you’ll see that the limit is probably more than what you can repay, say, in a month.
Therefore, it is very important to set a credit limit for yourself.
2 How to set your credit card limit
First of all, forget what your credit card issuer has set the credit limit.
Your mission should be to earn the rewards without spending uncontrollably.
Tips to set your credit card limit
Follow these 2 tips to set a good spending limit (on credit card) for yourself:
1 Plan a suitable budget
You need to plan a suitable budget to decide an amount you can spend. Now it’s your decision how much limit you set on your credit card(s) and how much you pay by cash.
Plan a budget such that you can follow it without much difficulty.
It’s relatively easy to follow the 50-30-20 budgeting rule: 50% of your after-tax income for your necessities, 30% for wants, and remaining 20% for savings.
You can also try other budgeting techniques if that suit you.
2 Do not call your issuer to lower the limit
Don’t take my words so seriously that you’ll call your issuer to reduce your credit card limit.
Doing so can reduce your score since your credit utilization ratio will increase with the decrease in your available credit.
Credit limit - What you need to know
Here’s what you need to know about your credit card limit:
- Each lender has its own criteria to create credit limits
- Higher limit and lower usage can increase score
- Disclose all sources of income to have a higher limit
- Research on credit limits from different issuers before choosing a card
- You can request a credit limit increase if you manage a card properly
- You can qualify for raising limit if your score is good
- Lower your spending when you reach the limit
- Pay a portion of your outstanding balance if spending is more
Advantages of raising credit card limit
Now, let’s have a look at the advantages and disadvantages of raising credit card limit in details.
1 You can have more buying power
If you want to buy a big ticket item, then with a higher credit limit, you can purchase without having to wait for financing approval.
Though it’s always better to repay outstanding balance at every billing cycle, you can opt for EMI option for a fixed number of months if you can’t pay the price within the same or next billing cycle.
2 Credit score may get increased
With the rise in credit card limit, the credit utilization ratio will be lower, since it’s a calculation based on debt to credit ratio.
3 No need to worry much about rainy day
You know that you have a cushion for sudden expenses. So, you won’t have to worry about rainy day much, and you’ll have a peace of mind.
But, it is advisable to save about 5% of your monthly income for the rainy days and it’s not a wise idea to charge your credit card for the entire amount.
Disadvantages of raising credit card limit
The advantage of raising the limit on your credit cards may prove to be disadvantageous, too. Find out how:
1 Increasing limit may dint score
If you take out a new credit card to increase the overall credit limit, the your score may lower down by some points, say about 7 points.
2 You may incur more debt
When you request a credit limit increase and it gets approved, that is, the card issuer raises the limit, it may entice you to spend more; much more than what you can repay at the same billing cycle.
So, be very careful not to spend more after raising the spending limit of your card(s).
However, if you incur debt, choose a suitable option to pay back and get out of debt.
How to keep credit use under control
To conclude, here are a few tips to keep your credit use under control, irrespective of whether or not your credit limit is increased.
1 Plan a budget and stop spending unnecessarily
To stop spending unnecessarily, plan a suitable budget and don’t purchase anything that’s not in your plan.
It’s very much required - Adopt the habit of saying ‘NO’ to yourself.
2 Repay debt as soon as possible
If you incur credit card debt, stop using the cards and repay the debt as soon as possible. Also, do not apply for additional credit, but focus on paying off your credit card debt as fast as you can.
3 Check your credit situation periodically
You should always review your credit situation and take necessary steps if required. Make sure you check your credit reports at regular intervals and dispute errors if necessary.
So, what have you decided? Do you need a credit limit raise?