[A]s you get credit cards, you will notice they give you a credit limit. This is the maximum amount you can spend on the card without paying some of it off first. Credit card companies often increase your credit limit as you prove responsible handling the amount you have. You may wonder if more credit is always good and what amount is right for you.
How Credit Limits Affect Your Credit Rating
How much credit you have affects your credit rating just as having a credit card in the first place. If you continue to max out whatever limit you have, it will lower your score. It can also hurt you when you go to apply for a car or home loan.
A lender will consider how much debt you have and how much your monthly payments are. Someone with higher credit limits that get maxed out will pay more each month in the minimum payment. This reduces the amount they can qualify for in a loan.
Some lenders also consider how much debt you could incur if you max out the card in the future. In general, a lender likes to see minimal debt, especially in the form of credit cards.
Reducing Your Credit Limit
If you carry a lot of debt or have trouble paying your minimum payments, credit card companies may choose to lower your credit limit to prevent problems in the future. This can impact your credit rating because you now have more debt in comparison to available credit.
You also have the option to turn down any credit limit increases if you don’t want to have that additional amount available. Some people only want to have enough credit for emergencies or to pay for certain items like rental cars or airline tickets on a credit card.
When it comes to answering the question of how much credit is the right amount for you, the answer lies in how much you can afford if you maxed it out and had to pay the minimum amount. However, you also want to be able to pay down the balance, so the amount might even be lower.
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