If you and your spouse have credit cards, you should know how important it is to stay current on all credit card payments. When you make payments, you are helping reduce your credit card debt, but it does not lower your overall credit limit. However, your credit limit can be reduced by a variety of factors, such as your spending habits and your propensity to carry a credit balance.
Credit Card Debt
Your credit card balance increases every time you make a purchase with your card and it decreases every time you make a payment. Most credit card companies require a minimum payment amount and some require you to pay the entire credit card balance owed every month. The amount of your credit balance will affect your ability to spend because the balance owed reduces your available credit limit.
Credit Debt Reduction
Here’s an example of how to reduce your credit card debt — Mr. X purchases a $90 car battery with his credit card. He receives his monthly statement, his credit card balance is $90 and his credit limit is $1,000. Due to the $90 balance owed, his available credit limit is $910. Mr. X pays off the $90 balance and now has reduced his credit card debt to zero. His credit limit is still $1,000 and, since he paid off the balance outstanding, his available credit limit is also $1,000.
Credit Card Limit
Your credit card limit is the maximum amount of credit you have on your card. If you attempt to buy after you have reached your credit limit, it is very likely that the transaction will be rejected. When you apply for a credit card, the financial information you provide determines your initial credit limit. As you use your card and develop a credit history, the credit card company may raise or lower your credit limit at their discretion. Making timely payments and maintaining a manageable credit card balance can provide some assurance that your credit limit will not be decreased.
Credit Limit Reduction
Here’s an example of how one’s credit limit can be reduced — Ms. Y has a $5,000 credit limit and this month has a credit card balance of $4,000 on her card. If she regularly makes purchases that increase her debt to levels that push her over the credit limit, lenders may begin to regard her as a high-risk borrower. Also, if her ability to make regular on-time payments begins to suffer, it’s possible that her credit limit could be reduced. Notice that her credit limit reduction is related to credit risk, and is not based on paying down debt.
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