Lots of folks know that a credit card can help build up your credit score. But did you know that one of the easiest ways to impact your score in a good way is by properly managing your credit limit?
What is my credit limit?
It's the maximum line of credit extended to you by a lender. Think of it as the maximum amount you can charge within a given period of time (though you don't usually want to charge that much). Knowing your credit limit (also known as your credit line) is important for a variety of reasons. If you don't know your credit limit, it's easy to find. You can simply sign in to your credit card account, view your limit on your credit card statement or call the number on the back of your card to ask your card provider.
Why does my credit limit matter?
Part of your credit score is determined by how much of your total credit you use. Having a good credit score can affect your ability to get financing on things like a home or car, start a business or get certain types of jobs. To learn more about your credit score, check out our simple explanation of credit reports and credit scores.
On a credit card, the size of your balance is compared to your total credit limit to determine what's called your credit utilization or debt-to-credit ratio. For example, someone with a $1,000 total credit card limit and $950 in total credit card debt has a high credit utilization and a debt-to-credit ratio of 9.5 to 10. A high debt-to-credit ratio could impact your credit score and send a signal to potential lenders that you may face credit trouble down the line.
This is one reason why it's a good idea to keep your credit card balance as low as possible in relation to your total credit limit. This can help keep your overall credit picture healthy and make it easier to pay off your balance each month. So, one way to improve your credit score is to reduce your spending on your card and pay down your existing balance.
What happens if I go over my credit limit?
Charging too much on your credit card can have a number of negative consequences. Credit card lenders may assess overcharge fees, decrease your credit limit or even close your account if you go over your limit habitually. Lenders may also increase your interest rate if they see that you habitually exceed your credit limit in your credit history, and your credit score may be negatively affected. So know your limit—and always keep track of how much you have charged to your card!