Knowing how much you can and should use helps you establish better credit scores and prevents you from using the entire amount of your credit
If you’ve ever used a credit card or line of credit, you probably know you have a credit limit. But what exactly is it? A credit limit is the maximum amount of money a lender will allow you to spend on your credit card or line of credit. However, knowing your maximum limit doesn’t mean it’s a good idea to use it. In fact, by learning how to manage your limit responsibly now you’ll be able to improve how much financing you can get in the future on things like a house or a car. Here’s what you need to know.
How do you know what your credit limit is?
Usually, the limit is included on your credit card statement or is available through your online account. You can also call the number on the back of the card to ask your provider.
How is a credit limit determined?
Credit card issuers set credit limits. They want the limits to be high enough for you to use your card, but low enough that you don’t spend more than you can afford. To find this ideal limit, consider your:
- Credit score and history
- Income
- Debt as a percentage of your income
- Limit on other credit cards
The type of card could also determine the credit limit. Some cards have preset limits that are the same for virtually everyone. Others have a credit limit range and use consumers’ credit history to determine where they are in the range.
Why is the credit limit important?
Much of your credit score is determined by how much you use of your total credit, which means that the balance and limits of all your cards are taken into account to calculate your score. Having a good credit score can influence your ability to get financing on things like a house or car, start a business, or get certain types of employment.
Usually, lenders prefer that you use less than 30% of your credit limit.
It’s always a good idea to keep your credit card balance as low as possible regarding your credit limit. Of course, it’s best to pay off your balance in full each month. If you can’t do it, paying as much as you can above the minimum is still the right way to go.
What happens if you exceed your credit limit?
Making a lot of charges on your credit card can have several negative consequences. Credit card lenders may charge fees, lower your credit limit, or even close your account if you frequently exceed the limit. Lenders may also raise the interest rate if your credit history shows that you exceed your credit limit regularly, which could negatively affect your credit score. So, know your limit and always keep track of the charges you’ve made.
Why did your credit limit change?
Credit card issuers constantly review how their customers use their credit cards and consequently adjust credit limits. Here are some common reasons why your credit limit might go up or down.
How Does Credit Increase?
- You have used your current credit wisely
- Pay constantly on time
- Your overall credit score improves
- Your income increases
- Request a raise from the card issuer
How does Credit decrease?
- You have acquired more debts
- You have stopped making payments
- Almost does not use the card
- Your credit report has an error
- Your identity has been compromised
Budgetary requirements
When you decide to go into debt, you have to pay back the money. With borrowing financing, the ability to move future cash movements is restricted by having to tie a portion of current profits to monthly payments. The amount allocated to that debt minimizes reinvestment in growth and in the distribution of profits among the owners.
With capital investment, you don’t have to pay back the money. Instead, investors receive a portion of the future profit allocation and potential profits from their stock if the company is successful.
Distribution of financial risks
When a debt is assumed, financial responsibility for the consequent payments is assumed. If you default on the loan as a sole proprietor, you will be sacrificing your assets and you will receive a hard blow to your creditworthiness. If you are set up as a limited liability company, the business will suffer damage to your reputation, but your profit expectations will be restricted.
The main reason for choosing capital investment as a source of financing is that the financial risk of operating the business is shared. Investors put their money on the assumption that they may never make a profit.
Profit potential
If the personal risk of a loan is not a problem for you, you will obtain greater financial benefits when the business starts giving money. Aside from paying off the debt, you won’t have to share the profits with others. You will be the one who gets the benefit.
If you choose to share risks, you will also have to share the wealth. The more capital investment you get to develop the business, the more your personal earning potential will be lowered.
Operational Control
A lender does not get involved in the operation of your business. After reviewing your financial situation and issuing the loan, the only thing that will worry you is that the payments are paid on time.
People who invest money in the company do not usually adopt this hands-on approach. Large equity investors want a more or less formal stake in the business. You may be forced to accept a member of the investment bank’s board in exchange for the money. If you prefer absolute autonomy in business decisions, capital investment is not the right decision.
Experience
A lender leaves you alone, but, on the other hand, you won’t get any professional experience with this type of financing. Your relationship is going to be one hundred percent financial.
If you accept a certain loss of control in favor of equity investors, you may gain a wealth of knowledge. Some entrepreneurs make their decision to go to capital investors based equally on their experience, knowledge and credibility in the sector, as well as on monetary issues. A valuable expert who has money to put into play, can become a great asset for the growth of the company.