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Why You Should Forget About Your Credit Limit

[Tuesday, June 18th, 2013]

The first time you apply for a credit card, you eagerly wait to see how much credit you will be given. If you have no credit history, it will probably be low–maybe a little as $300. But still, that $300 credit card is the first one you have ever gotten, and it feels good.

But that doesn’t mean you should run right out and spend $300. In fact, if it’s your first credit card, you want to make sure that you use it carefully, so your credit history gets off to a healthy start. That’s the way to ensure a high credit score, and the key to getting that credit limit lifted.

The reason you don’t want to spend all the way up to your credit limit is simple: the amount of available credit you have makes a big impact on your credit score. Your credit score is calculated using several factors. Payment history, amount owed, length of credit history, types of credit used: all of them make up your total score. Credit scores range from 300 to 850, and a good or excellent score is in the high 700s or 800s. The only thing that matters to your score more than how much available credit you have is your payment history.

To remember how much your balance matters to your credit score, and how much you should spend, remember the number 30. Your amount of available credit counts for 30% of your score, and it’s best to keep your credit card balance at 30% of your limit. (Ten percent is even better.)

That means even though your credit limit is $300 (using the example above), you should try to keep your balance below $90 – or even $30. No, that isn’t very much, but if you are smart about using your card, your credit score will soon improve and your limit will be lifted. After you have had your card for a few months, you can always call and ask to have a higher credit limit.

Once it is lifted, and as your credit history gets longer and your credit score rises, remember the 30% rule. The first time you are given a credit card with a $30,000 limit, you might feel like you have thousands of dollars burning a hole in your pocket. But you don’t. Thirty thousand dollars of credit is not the same thing as $30,000 in the bank. If you don’t have it in your bank account, don’t charge it on your credit card.

So, actually, the title of this article is not true. You shouldn’t really forget about your credit limit. Going over it can be expensive, to the tune of an average over-the-limit fee of $35. But you should not think of your credit limit as how much you can afford to spend. Maxing out your credit score is bad for your credit score and can be stressful for you, if you cannot pay off your balance in full each month.

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