7 Things First-Time Credit Card Users Should Know About Credit Limits

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  • When you're approved for a credit card, the card issuer will also approve you for a specific credit limit.
  • The credit limit is the maximum balance you can have on your credit card.
  • It's recommended that you use less than 30% of your credit limit, because this is good for your credit score.

Credit limits can be a confusing subject. Here's the key information that will help you understand how they work.

People who are new to credit often have questions about credit limits. What exactly does this term mean? Do you need to get a new card after using up your credit limit? And how do credit card companies decide on the amount of credit they give you?

These are all normal questions on a topic that's hardly ever taught in schools. Even though credit limits don't get discussed much, it's important to understand them so you don't run into any issues with your credit cards. In this guide, you'll learn everything you need to know about credit limits.

1. A credit limit is that credit card's maximum balance

The credit limit is the most you can spend on your credit card. If your card has a $1,000 credit limit, then the maximum balance is $1,000. Transactions that would push your card's balance over that limit normally get declined.

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The card issuer will provide your credit limit in the documents you receive with your credit card. This information is also available in your online account and by contacting customer service.

2. The credit limit minus the current balance is the card's available credit

Your available credit is the amount you're currently able to spend. Let's say your card has a $1,000 limit, and the current balance is $800. You'd have $200 left of available credit. If you tried to make a $300 purchase, the card issuer would most likely decline it, because you don't have enough credit to cover it.

3. You can "reuse" your credit limit by paying down the balance

A credit card is what's known as a revolving line of credit. That means you can reuse your credit after you've paid down your balance, which is a key part of how credit cards work.

For example, your credit card has a $1,000 limit, and you charge $500. When your payment is due, you pay the full amount of $500 and bring the current balance down to $0. You now have $1,000 in available credit again.

4. The card issuer decides your credit limit based on several factors

When you apply for a credit card and get approved, the card issuer sets a credit limit for you. It bases your credit limit on multiple factors, but the most important are your income and your credit history. Applicants with higher incomes tend to get higher credit limits.

Your credit history and credit score also play a large role. Those who are new to credit usually receive lower limits of under $1,000. Once you've been building credit for a few years, you could qualify for limits of $5,000 to $10,000 or more.

5. It's better if you don't use too much of your credit limit

A common mistake for first-time credit card users is taking a credit limit as an invitation to spend that much money. This can get you into credit card debt and negatively affect your credit score. There are a couple of good rules to follow to avoid these issues:

  • Only use your credit card for purchases you can afford to pay in full. When your payment is due, pay off the full balance. With credit card interest at record highs, carrying a balance is now more expensive than ever.
  • Keep your balance below 30% of your credit limit. For example, if your credit limit is $1,000, keep your balance below $300. Having a low credit utilization ratio (your balance compared to your credit limit) helps your credit score.

6. You can request a higher credit limit

To request a credit limit increase, call the number on the back of your card. Some credit card companies also let you request this in your online account. If your request is approved, you'll then have a higher credit limit.

You'll have the best chance of success if you've been paying your credit card bill on time for at least six to 12 months. It also helps if your income has increased since you applied for the card, although this isn't required.

7. You can't be charged a fee for exceeding your credit limit unless you agreed to over-the-limit transactions

Credit card companies will typically decline transactions that will push your card's balance over the credit limit. If an over-the-limit transaction does go through, you can't be charged a fee unless you specifically opted in to approve this. This is a legal protection provided by the CARD Act of 2009.

Your credit limit is one of the most important numbers to remember when you use your credit card. By keeping your card's limit in mind, you can avoid having transactions declined for being over the limit. You can also keep your balance low enough that it won't hurt your credit score.

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