Why Your Credit Limit is Important
Properly managing your credit limit can have a positive effect on your credit score. And a good credit score can lead to more financial opportunities, like better rates on car loans, personal loans, and even your mortgage.
Keep reading to learn more about your credit limit and why it’s so important.
What is a credit limit?
Your credit limit is the maximum amount you can charge to a credit card. Remember though, just because you can charge that much, it doesn’t mean that you should.
If you have a new credit card and aren’t sure what your credit limit is, don’t worry, it’s easy to find. Your credit limit will be included on your credit card statement. You don’t have to wait for that paper statement, though. You can always log in to your account and see it there too.
Why does a credit limit matter?
Your credit limit, and how you use it, is important because it plays a part in determining your credit score. A good credit score can impact many areas of your life, like:
- Getting a car loan
- Getting the best rate on a personal loan
- Getting a mortgage
- Starting a business
Using too much of your credit limit can have a negative effect on your credit score. The size of your balance compared to your total credit limit is called your credit utilization or debt-to-income ratio. If the percentage is too large, your credit score could go down.
For example, let’s say you have a credit limit of $1,000 and you have a $950 balance. This means you have a credit utilization of 95%, and a debt-to-credit ratio of 9.5 to 10. This is considered incredibly high. Not only would this affect your credit score, potential lenders might also view it with concern.
Most people agree that you want to use 30% or less of your available credit. So if your limit is $1,000, you’ll want to keep your balance below $300.
It’s best to pay off your balance in full each month. If you can’t do that, try to pay as much over the minimum amount due as you can.
If you have a sound budget in place and are sticking to it, setting up automatic payments to your credit card could be a good idea.
What happens if you go over your credit limit?
Going over your credit limit can have a number of negative consequences, including:
- Overcharge or over-limit fees (SF Fire does not charge over-limit fees)
- Decreased credit limit
- Lower FICO® Score
- Higher rates on loans
If you’re worried about your credit limit or spending habits, we’re here for you. We offer free, confidential financial counseling to our members to help them get back on track.
You can also check out some articles in the Money Trouble section of our Learning Center to get some advice on a variety of common issues.
Pretty much everybody gets in financial trouble at some point. Try not to worry or stress too much. The important thing to remember is that you can get back on track.
