October 17, 2024
Knowing what the right credit card limit is for you can be tricky. We look at how to tell if your credit card limit meets your needs or not.
Navigating credit card limits can feel like finding the right pair of shoes—too small, and it pinches; too large, and you might trip. Whether you’re a cautious spender, a frequent shopper, or someone building credit, knowing the right credit card limit can prevent overspending or underutilization.
Responsible credit usage isn’t just about having a credit card; it’s about leveraging it wisely to improve your financial health. Having a credit card limit that works for you means that you can manage your finances more effectively and can even help you improve your credit score.
When determining your ideal credit card limit, several key factors should guide your decision-making process. Taking your overall financial situation, spending behaviour, and goals into account will help you choose a limit that aligns with your needs. Here are some key things to consider:
Your income plays a crucial role in determining your credit card limit, as it directly impacts your ability to repay credit card charges. Lenders typically consider your income to determine a suitable credit limit. A higher income often means being offered a higher credit limit, but it's essential to ensure that your credit utilization remains within manageable levels.
Consider your monthly expenses, including bills, rent or mortgage payments, groceries, transportation, and other essentials. This will help you gauge how much available credit you can responsibly use without straining your budget.
Reflect on your spending habits. Do you tend to pay off your card in full each month, or do you carry a balance? Your payment behaviour influences the appropriate credit limit for you.
If you usually carry a balance, a lower credit limit may help prevent excessive debt accumulation and high interest charges.
Whether you're focused on debt repayment, saving money, or building credit, your credit limit should support these objectives.
There are no purchases that you need to make with a credit card. In fact, it’s often better for you to pay with debit or cash instead of a credit card. Credit cards charge interest rates between and 21%–25%, meaning if you don’t pay your bill on time and in full, it will cost you more.
That doesn’t mean there are no advantages to using a credit card. For instance, purchase protection is a benefit provided by many credit cards that offers a guarantee on the goods you buy. If the item gets damaged or stolen within a specific timeframe, the credit card company may help you to repair, replace, or get a refund for the item.
It may sometimes make more sense to make a purchase with a credit card, for a large purchase for instance, but even then, this is not necessary. If your card allows you to earn points for future purchases then using it may be to your advantage, but only if you can afford to pay it off in full and on time.
Paying with cash or debit makes you really consider your purchases because the money comes out of your account right away.
1. Plan to use no more than 30% of your credit limit each month. If your limit is the average $6,000, keep your balance under $1,800 so you have wiggle room to cover an emergency if it comes up.
2. Pay your bill in full every month (or as close as possible to full). Carrying a balance into the next month adds interest to what you already owe. And credit card interest is compound, which means you’re charged interest on the interest. But if you pay your bill every month, you don’t have to worry about interest.
3. Keep a hawk’s eye on your credit card spending. Review your bill every month and make sure you can account for every purchase. Credit card scams are everywhere, and getting charged for something you never bought is more common than anyone would like to believe. In fact, credit card fraud is the number one method of financial fraud in Canada.
There are ways to tell if your credit card limit is working for you. Only if you are struggling with one or more of these things should you consider making any serious changes to your overall limit.
One of the most obvious signs that your credit card limit is working for you is that it adequately meets your financial needs. Whether you use your credit card for everyday expenses, emergencies, or specific purchases, having enough credit available ensures you can cover necessary costs without maxing out your card.
When your credit card limit aligns with your spending habits and income, managing your monthly bills becomes more manageable. You can comfortably pay off your full balance each month on time without straining your budget or relying heavily on credit.
As we mentioned you should not be using more than 30% of your credit limit at a time. If you consistently keep your credit card balances below this threshold, it indicates that your credit card limit is sufficient for your needs. This will also boost your credit score over time.
If you rarely find yourself needing or requesting credit limit increases, it suggests that your current limit is adequate. Constantly seeking higher credit limits may indicate that your spending habits are outpacing your available credit, potentially leading to financial strain and credit score issues. Asking for credit limit increases every few months can also lower your credit score.
Among the reasons someone might lower their credit card is to spend less on credit, thereby raising their credit score.
And this would be the wrong approach because utilization rate is a factor in setting credit scores. Charging $1,800 a month on a $6,000 limit keeps you at that healthy 30% utilization rate. But lowering your credit limit to $4,000 while maintaining an $1,800/month spend puts your utilization at 45%. This could actually lower your credit score.
So, while you always have the option to lower your limit, hold off until your monthly charges would still keep you in that healthy 30% range.
It was alluded to above, but it bears repeating considering the staggering $91.5 billion that Canadians owe in credit card debt. Having $6,000 of credit to use shouldn’t mean you have $6,000 to spend. Stay within your means regardless of your credit card limit, and you should have no problem.
If you find yourself struggling to manage your credit card payments or facing financial challenges beyond your control, seeking professional assistance can provide valuable insights and solutions. Consider consulting with a Licensed Insolvency Trustee (LIT) to assess your financial situation comprehensively.
A Licensed Insolvency Trustee can help you understand your options, such as debt counselling, consumer proposal, or bankruptcy, if necessary. They can negotiate with creditors on your behalf to develop manageable repayment plans or explore debt relief strategies tailored to your needs. The first consultation with a Licensed Insolvency Trustee is free of charge.
October 17, 2024
Knowing what the right credit card limit is for you can be tricky. We look at how to tell if your credit card limit meets your needs or not.
