How to figure out your ideal credit limit, according to experts
With any credit card, there is usually a limit to the amount you can spend. Experts say choosing the right limit can play an important role in maintaining credit health.
Determined by factors such as your income, credit history, and ability to repay, your credit limit is the maximum amount of money you can borrow from a credit card or account.
“Generally speaking, more credit is better, as long as you don’t use it as a crutch to overspend and take on too much debt,” says Ted Rossman, senior industry analyst at Bankrate, which focuses on the credit industry.
Experts generally recommend looking for a limit well above what you’d spend in a month to maximize your credit score. Your “ideal” credit limit will depend on your personal spending habits and preferences, Rossman says.
The best limit for your credit score
Keep your credit score high too, it’s best to just use 10% to 30% Pay off your existing loan in full and pay your statements in full each month, says Dean Tsantes, a certified financial planner and financial advisor at VLP Financial Advisors in Vienna, Virginia.
The percentage of available credit you use is a measurement known as credit utilization. Keeping usage low shows lenders that you manage credit responsibly, which will help improve your credit score; On the other hand, reaching this limit every month signals to lenders that you are over-reliant on credit and pose a higher credit risk, thus lowering your score, says Rossman.
Looking back from the ideal credit utilization of 10% to 30%, if you spend about $5,000 a month on your card, you should have a limit of $50,000, Tsantes says. By the same measure, if you typically spend around $2,500 on your card, $25,000 might be a good limit, he adds.
“The idea is that you never come close to reaching that limit,” Tsantes says. Having a seemingly high limit serves not as money that can be used, but rather as a buffer that will keep your balance well below your maximum and your credit utilization low.
It may also be wise to consult a trusted financial professional who can help you determine the loan amount that makes sense for you.
It’s okay to stick to a more practical limit
Credit card debt can be costly and difficult to pay off. So if you know that your credit limit is the amount you’ll likely be able to spend each month, it might be smarter to stick to a limit that covers just the essentials with a small buffer, says Rossman.
“You definitely don’t want to hit that limit or get close to that limit or spend more than you can afford to pay back,” he says. “While having more credit is good for your credit score, it can be a danger if you’re going to use it to overspend.”
But Rossman says it’s still possible to maintain a low credit utilization rate even with a lower limit. If your credit limit is sufficient to cover your basic needs and you are approaching your limit each month, there are “workarounds” to reduce your usage, such as making extra payments throughout the month to keep your usage below 30%.
How can you increase your credit limit?
To increase your credit limit, Rossman says you can request a credit limit increase on an existing card or open a new card with a new credit limit.
Start by checking with your current credit card issuer to see if a request for a credit limit increase would trigger a hard or soft credit investigation, he says. difficult questions While it may cause a small, temporary drop in your credit score, a soft inquiry is a routine or informational check that does not affect your credit score.
If your card issuer will use a soft inquiry, increasing the limit on an existing card can increase available credit and reduce your credit usage without hurting your score, says Rossman.
If your card issuer is going to conduct a rigorous investigation, opening a new credit card with different rewards and benefits may be more strategic, Rossman says. This way, he says, you can have more options to maximize the benefits on your cards.
Although increasing your credit limit increases your spending power, avoid viewing that extra credit as more money or an emergency fund for “desperate times,” says Rossman. Spending more than you can afford on a credit card can lead to high-interest debt that becomes difficult to repay, especially if your finances are already strained, he says.
“Having a credit card with a $5,000 limit — yes, that can help you — but it’s not the same as having $5,000 in the bank,” says Rossman. “This is a loan. It could be a very expensive loan.”
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