Even though one can go over their credit limit in certain instances, most of the reputable credit repair services in Austin, Texas will tell you that it is not a wise move–especially if you want to build up and preserve your credit score. This is because exceeding your credit limit can negatively impact your credit utilization ratio, which is responsible for measuring how much of your accessible revolving credit you are currently using. This means that your credit utilization should remain as low as possible to keep your credit scores high or in the optimum range.
Understanding How Credit Limits Work
To make things more straightforward, it is essential that we point out that a credit limit refers to the maximum one can charge on a credit card. Knowing this bit of information will also help you when you are trying to understand what hard inquiries are.
Moving on, if you exceed your limit–for any reason–you will have to deal with inevitable consequences, including a lower credit score and various credit card fees. This is why, if you can, you should avoid going over your credit limit at all costs.
When your new credit card comes in the mail, you’re given a paper listing your credit limit which is the maximum amount you can spend on your credit card. Every so often, if you’re a good borrower, you can increase your credit limit. But have you ever wondered how this credit limit is even decided?
The method used by credit card companies to determine your credit limit is called “underwriting.” Underwriting works via mathematical formulas, but the exact details of this method are kept tightly under wraps by each institution as it’s how these companies make their money.
What Is a Credit Limit?
As mentioned earlier, a credit limit is the maximum amount you can spend on your credit card. While a high limit allows you to purchase more expensive items, offers you more flexibility, and can improve your credit score, it can also get you into trouble quickly if you get buried in credit card debt, and then have contact with a debt collection agency like Ad Astra Recovery Services.
It’s important to remember:
- How much of your credit you use determines a portion of your credit score. It’s wise to have more available credit than you use to keep your credit score high.
- While most Americans have credit cards, few think much about their credit limit, which is one reason so many get into trouble with their credit cards. Fortunately, it’s easy today to get a handle on your credit limit with the many apps that assist you in managing your credit cards.
- If you don’t have a smartphone or prefer not to use an app to achieve this, you can use the card issuer’s website to get this helpful information. Most of these sites will give you your balance and limit at a glance, so you know exactly where you stand.
- If you don’t have access to an app or a website, you should be able to find this information on your statement each month.
How Are Credit Limits Determined?
When a company sets a credit limit, it shows how much it trusts the borrower to pay back what they owe. If you’re given a high limit, the bank thinks you’re low risk and will likely pay off your debt and make timely payments, meaning you’re considered a good borrower.
However, if you don’t look like a low-risk borrower to the bank, it’ll give you a low limit to start. If you pay your debts responsibly, the bank or card issuer may raise your limit after a set time. After some time, you can also request to increase your credit limit, if need be.
The Role of Credit History
A major determining factor in your credit limit is your credit history. When you apply for a credit card, the card issuer checks things like your annual income and your credit report to determine what your limit will be.
When it looks at your credit report, it’ll factor in your repayment history, your credit history length, and how many credit accounts you have open. Open credit accounts include other credit cards, mortgages, student loans, auto loans, and personal loans.
Card issuers also look to see if you have any derogatory information on your credit report. Bad marks on your report could be bankruptcies, missed payments, late payments, tax liens, or accounts that have gone into collections.
Is It Possible to Go Over Your Limit?
For most items, your credit card company will deny the transaction that puts you over your limit, but some don’t. Some card issuers allow users to opt into an over-the-limit coverage whereby they pay a fee if they go over and the card issuer honors the transaction.
Still, even with this protection, it’s best not to go down that road. Besides hurting your credit, going over the limit puts you at risk of having your limit decreased or your account closed by the card issuer, and it may also cause your card issuer to increase your interest rate.
It’s essential to understand how credit limits work and how they impact your credit score; equally important is staying on top of your credit score to know where you stand. Many apps available on your smartphone let you access your credit score and show you where you need to improve.
Should an Individual Go Over Their Credit Limit?
Going over your credit limit is not advisable. Sometimes, it may happen by accident; in other scenarios, you may have needed extra cash in a hurry. Regardless, we cannot overstate that going over your credit limit will ultimately lead to substantial financial issues such as extra charges, debt, and damage to your overall credit score.
As a borrower, your priority at any given time should be to avoid maxing out your card, as this is one of the best ways of practicing proper financial responsibility. Do everything you can to maintain a low credit utilization rate, as this will be a wise move in the long run, regardless of how tempted you may be to exceed your limit.
According to most financial experts, if your circumstances force you to go over your credit limit, the best you can do is to sit down and ascertain why you did so in the first place. This will help you determine whether or not you need to review your budget. Another thing you should do is to figure out which purchases led to you spending more and whether it will be possible for you to increase your income or make changes to your spending habits.
Other Items That Factor in Your Credit Score
While the underwriting process differs depending on the company, many consider identical variables in determining your limit. Some items they believe are the credit limits on your other accounts and your work history.
Your debt-to-income ratio also plays a role. If you have a lengthy work history and low debt-to-income, you’ll be seen as low risk and most likely be given a higher limit.
If you apply for a card and don’t get the credit limit you were hoping for, it’s most likely something in your credit report holding you back. This is why it’s a good idea to check your report regularly to know where you stand and what you can do to improve your credit score.
How Do Credit Limits Affect Credit Scores?
While credit card limits affect how much purchasing power you have, it also directly impacts your credit score. One of the ways it does this is mentioned above in your credit utilization ratio or debt-to-credit ratio–this ratio is important as it comprises 30% of your FICO credit score.
People with low credit limits get into trouble quickly with credit utilization, which is why it’s best to strive for higher limits. If you have high credit utilization, it reflects poorly on your credit score.
However, it’s important to remember that every credit report is different, and just because you brought your ratio down and it reflects positively on one report, it doesn’t mean it’ll do the same on another. Of course, it’s wise to keep your credit utilization ratio low when possible–many experts say under 30% is a good number to aim for. An excellent way to increase your score and lower your credit utilization ratio is to ask for an increase in your credit limit but keep your card using the same.
In Summary
From the information provided above, it is safe to say that going over your credit limit is never a good idea, regardless of whether it is an available option. As a result, if you wish to avoid going over the limit, it is essential that you first establish how much credit is currently available to you, have a budget, and watch your spending habits. You also need to remember that it may not always be a purchase that takes you over the edge–if you carry an extremely high balance on your card, your interest and fees could be sufficient to push you over the limit, so remember to keep an eye on your limits and fees.