While credit cards have many benefits — such as providing a financial cushion in case of emergencies, helping build credit scores or accumulating rewards — they do have limits, which vary depending on several factors. Exceeding these may trigger a slew of short- and long-term consequences, but Americans seem to be aware of that fact and are acting accordingly, a new survey suggests.
A credit card limit — the maximum amount you can spend on your credit card — can start at a few hundred dollars and go to tens of thousands of dollars, depending on criteria such as payment history, current accounts, account history, debt and income, according to Chase.
A new GOBankingRates survey found that 40% of Americans have never hit the limits on their credit cards.
“This is not surprising, given that most cardholders have ample credit limits relative to their spending levels,” said Charlie Wise, senior vice president and global head of research and consulting at TransUnion. “For all U.S. cardholders, the average utilization — balance compared to credit limit — across all cards in their wallet is less than 20%. And for super prime cardholders — those with the best credit scores, over 40% of all credit cardholders — utilization averages under 10%.”
Wise added that many cardholders with lower credit scores have lower credit limits and therefore higher utilization.
“These cardholders are more likely to experience hitting their card limits in months of heavy card spend,” Wise added.
Howard Dvorkin, CPA and Chairman of Debt.com, echoed the sentiment, saying that the 40% figure is not surprising as consumers with the highest credit limits have the best credit scores.
“Credit card issuers aren’t going to give you a $20,000 limit if you’re a bad risk,” he said. “So they look hard at your credit score. That’s because people with high credit scores reliably pay off their debts — which means they’re fiscally responsible. The last thing they want to do is max out a credit card unless it’s absolutely necessary.”
How Do Americans Avoid Hitting Their Limits?
More than a third of Americans — 37% — say they pay their balance off completely every month, while 19% say they pay more than the minimum but never the full balance, and 12% say they make only the minimum payment, according to the GOBankingRates survey.
Ben Reid, general manager of M1 Spend, explained that a common rule of thumb is to not use more than 30% of your credit across all sources. Anything above 30% will start to negatively impact your credit score, and a lot of advice suggests aiming for significantly lower than that.
“The absolute best way to keep your balance in check and, more importantly, avoid high interest charges,” Reid said, “is to pay off your statement balance in full each month, ideally via autopay so you don’t have to think about it.”
However, the GOBankingRates survey notes that Americans rarely use autopay or a third-party app, as only a meager 0.90% report utilizing those tools to keep their balances in check.
Another infrequently used way to avoid hitting credit card limits is having the limit raised before it’s crossed, as only 3% say they have done this.
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This meager figure is not surprising; asking for a credit card limit increase can be grueling. Experian explains that while each card issuer has specific guidelines, in general, you should be a cardholder for at least six months and should not have requested an increase in the past six months.
In addition, before a credit increase can be granted, you will have to show that you’re a responsible cardholder (no late payments or over-the-limit purchases), that your credit is in good shape and that your income is adequate to cover monthly housing and debt.
Jason Vissers, credit card analyst at MerchantMaverick.com, said the best way to avoid hitting your limit “is to pay your expenses through means other than your credit cards, control your spending and/or get multiple credit cards in order to increase your total amount of credit available.”
Why You Should Avoid Hitting Your Limit
There is a slew of negative consequences for consumers who do hit their limits.
“Most likely, any charges to your card that are attempted will be declined if they would place you over your credit limit,” Vissers said. “If you have over-limit protection, which many cards don’t even offer, the charge may go through, but you will likely be hit with extra fees and/or be penalized by having your credit limit lowered or your interest rate increased.”
Another potential consequence of hitting the limit is that it might affect your credit score and cost you a lot of money in interest.
“It’s possible that you could hit your credit limit and pay the charges in full before interest accrues, but even then there could be substantial credit score damage because credit utilization — credit you’re using divided by credit available to you — is typically reported on your statement date,” said Ted Rossman, senior industry analyst at CreditCards.com. “Credit utilization is a big part of ‘how much you owe,’ a category that in totality comprises 30% of the FICO scoring formula. To a lender, maxing out a credit card looks like a very risky behavior.”
Rossman said that — even if you’re able to pay in full to avoid interest — seek to keep your credit utilization ratio down by making extra payments throughout the month.
“I like to pay my cards every 1-2 weeks to keep my utilization in check and stay on budget,” he said. “You could also request a higher credit limit, but make sure not to use that as an excuse to overspend. I’m surprised that many people have maxed out a credit card. This is a definite credit no-no.”
The First Step Is Knowing Your Limit
Finally, while it might be obvious, the first thing to do is know your credit limit, said Tomas Campos, co-founder and CEO of Spinwheel. His company’s internal research shows that roughly 65% of cardholders do not know their credit limit across their cards.
The second is to understand how you are using your credit cards. For example, determine whether you are a “transactor,” a cardholder who pays off the balance every month, or a “revolver” who depends on credit limits to supplement the cash to pay for expenses.
Campos too notes the negative consequences of hitting the limit, which can sometimes kick in even before you hit your limit.
“Once you exceed 30% of your total credit card limit, there is a risk that your credit score could go down,” he said. “Beyond this, there are almost always expenses that pop up that one doesn’t account for.”
Campos added that, if you’re nearing your credit card limit and end up exceeding it, your rates could end up getting raised and credit card companies might decline transactions over the limit.
“Sometimes there are significant consequences that could, in turn, lower your credit score, make your interest rate go up, and ultimately make future borrowing less than ideal,” he said. “That’s why it’s best to take a comprehensive look across all of your debt to make a smarter debt management plan — and that allows you to take control of your debt.”
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