Manage Your Credit Limit

(Use Responsibly)

Your perfect credit limit depends on your circumstances. Sometimes you might want a lower limit to help you manage your own spending urges. In other cases, raising your credit limit can make you look (and feel) like a high roller — as long as you don’t actually spend more than you can pay back. So, how do you use your credit limit responsibly?

KNOW YOUR CREDIT UTILIZATION RATIO

Your credit limit is part of a bigger picture called your credit utilization ratio. It might sound scary, but it’s pretty simple: How much credit do you have available and how much are you using?

Gather all of your credit card accounts (get out your statements or, if you want an extra gold star, pull your credit report). Look only at revolving debt accounts, like credit cards, where the balance rolls over each billing cycle, and you decide how much to pay. This is different from installment debt, like your car loan, where you pay the same amount each month.

  • Step 1: Add up your credit limits. This is your total amount of credit available. Let’s say you have two cards and each one has a $1,000 limit. Your total is $2,000.
  • Step 2: Add up your balances. This is the total amount of credit you are using. Let’s say you have a $500 balance on each card, for a total of $1,000.
  • Step 3: Divide the total amount you’re using by the total credit you have available. Dividing $1,000 by $2,000 gives you 0.5. Make it a percent by moving the decimal two spots to the right. So, 0.05 = 50%.

Your credit utilization ratio is 50%, which means you’re using half of your available credit. Ideally, you want to keep your ratio as low as possible, but not zero.

So, if you have $2,000 available, and you are using 10% ($200) you are doing fantastic.

If you’re using 25% ($500) you’re still looking good.

It’s only when you get above 30% ($600) that most experts say you’re headed for trouble.

Why not zero? Because creditors want to see how you’re using credit. If you’re not using it, there’s nothing to see. If you’re using 25% ($500) you’re still looking good.

Young hipster man in hat smiles thinking about increasing his credit limit

HOW TO INCREASE YOUR LIMIT

That doesn’t mean you have to carry a balance. You can use your card for purchases that you pay off each month.

WHY INCREASE YOUR CREDIT LIMIT?

If the credit card company increased your limits so your total credit available was $5,000, then your $1,000 balance would suddenly transform your ratio to only 20% instead of 50%. Boom. Your credit picture just got a lot brighter.

But … even though it looks better on paper, a higher credit limit doesn’t change the fact that you owe that money. If you really want to improve your credit utilization in a healthy way, you’re better off paying down the balances.

Call your credit card company or submit your request online. You’ll likely get an answer pretty quickly because the internet is amazing. They will consider:

young Muslim woman thinking about her credit utilization ratio
  • Your credit report/score. They’ll look at all your revolving credit accounts, not just the one you’re applying for. A poor credit score can hurt you, but it’s still worth asking.
  • How long has your account been open? If this is a brand-new account, they’re probably not going to raise your limit yet. And if you’ve applied for a bunch of credit cards recently, that’s also a red flag.
  • What’s your income? They’re going to want to see that you can pay back the money if you’re asking them to give you more.
  • How much is your rent/mortgage? Housing is usually our largest expense, so they’ll want to see you’re not in over your head.
  • How have you behaved so far? Have you had any late or missed payments in the last 6 months? How much of your current limit are you using? Do you only pay the minimum? If you look like you’re in trouble, they’re not going to go for it.

KNOW THYSELF

Raising your credit limit can make your credit utilization look better, but be careful that you don’t just go out and start charging more. And the one thing you never want to do is close your credit accounts. Even if you’re not using them, it will hurt your overall credit utilization because you will have less total credit available.

As always, we’ve got your back. — The On Your Own Team End of article insignia




[Any reference to a specific company, commercial product, process or service does not constitute or imply an endorsement or recommendation by On Your Own, the National Endowment for Financial Education or any of its affiliate programs.]