There’s more to being a credit card holder than whipping it out to charge items. If you don’t want to be one of the many Americans with a ruined credit score from misusing a credit card, you need to learn a little about your plastic. If you don’t understand what credit limit or high balance means, you could inadvertently tank your credit score, which would make it difficult for you to get future loans, a mortgage, an apartment or even a job.
Credit limit is the amount of money the credit card company allows you to spend on the card. Credit card issuers do not randomly assign this number; there is a science behind it. Your credit score and your income are the two major determiners of what your credit limit will be. Once you have the card, your issuer keeps tabs on how you use it. It looks at whether you pay your bill on time, whether you take cash advances and whether you pay off your balance in full each month. Your credit limit could be raised or lowered depending on your credit history.
Raising or Lowering
You might be able to get your credit limit raised by asking the credit card company to do so. If you have been paying your bills on time, you could be successful. If your income has increased as well, you stand an even better chance. Your credit card issuer could also reduce your credit limit. Reasons for the reduction could include your credit score dropping, late payments, maxing out your card (or coming close to it) and taking cash advances. Sometimes, the reason is simply the card issuer lowered rates across the board, and it was nothing you did.
High balance refers to the highest amount you have owed on your credit card. This number factors into your credit score. To be eligible for the highest credit score, your high balance should not exceed 30 percent of your credit limit. The amount of available credit you use is increasingly becoming more important to determine your credit score, according to myFICO.com. FICO is a widely used credit scoring system the credit reporting agencies use to determine your credit worthiness.
Be sure you know what your credit limit is each month and how much you are charging. You want to ensure you don’t spend more than your credit limit. That could lead to over-the-limit-fees, an increase in your annual percentage rate and a decrease in your credit limit. If you overcharge too often, your credit card issuer could close your account.
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