Understand Credit Limit to Help Improve Credit Score and Avoid Fees
A Congressional study released in October revealed a large increase in credit card fees and that disclosures offered poor explanations about the fees. Over-the-limit fees jumped from an average of $13 in 1995 to $31 in 2005. The study reported that 13% of active US accounts paid an over-the-limit fee last year.
"Even though credit card disclosures are difficult to read, cardholders need to educate themselves and to understand the terms of their credit card. Not understanding all of the terms of a credit card can be costly," says Bill Hardekopf, CEO of LowCards.com. "One of the easiest places to start is the credit limit, yet 13% of cardholders paid a high fee for exceeding the credit limit last year. Even worse than the late fee is the default rate of over 30% that you may receive if you go over the credit limit. These can be avoided if you understand what your credit limit is, how to easily monitor your credit limit, and how you can control your credit limit."
The credit limit is the maximum total amount--for purchases, cash advances, balance transfers, fees, and finance charges--you may charge on your credit card. The limit is determined by credit score and payment history. The better your score and history, the higher your credit limit will be. Credit limits range from $200 to 50,0000 or more.
"Credit limits are an indication of how the credit card issuer judges your credit-worthiness and their assumption about how you will use their card. The opinion and credit limit may vary by issuer. You may even get different credit limits from different issuers," says Hardekopf.
The credit limit you receive with your credit card is not fixed forever. The issuer regularly monitors your account; if you build a good credit history and pay on time, you may request a higher credit limit, or the issuer may automatically increase your credit limit. To request a higher limit, contact your issuer. You will have to provide income information and employment details, as well as information on assets and liabilities, loans, and other credit cards. They should be able to do this without pulling your credit report. If they have to pull your report, they should let you know first.
However, if the issuer automatically increases your credit limit, this does not mean that you can afford it. This is not like receiving a raise, and it doesn't give you permission to spend more. If you carry a balance, a higher credit limit means the opportunity to increase your debt balance and the amount you will have to pay them.
"Credit card companies positively promote credit card increases as the freedom to buy the things you want, when you want. However, if you already carry a high credit line increases. You don't need to add more debt, you need to pay down what you have," says Hardekopf. "Just contact the issuer to decline it."
Issuers may also decrease your credit limit. They not only monitor the account you have with them, but the accounts you have with other creditors. If you pay late, bounce a check or get a big loan, your credit card limit may be lowered. They should notify you about the new limit, but it is a good idea to look at your credit limit and balance each month to make sure nothing has changed, and to make sure you are well under the limit.
It is a good idea to leave plenty of room in your credit line. Credit utilization is important to creditors, and it is a large factor in 30% of your credit score. This is the formula for calculating credit utilization: total amount of debt on credit cards and revolving accounts divided by the total amount of debt available on those cards. The lower the fraction, the better your score. For example, if you have $3,000 in debt and $10,000 in credit lines, you are using 1/3 of your available credit. It is a good idea to keep your debt at about 30% of your credit limit. If your score is 1, you have maxed out your credit cards.
Don't assume that your card will be declined if you go over your credit limit. Many issuers will allow you to make purchases beyond your credit limit, but you will have to pay a high fee for it. Many issuers now offer email updates when you are nearing your credit limit. Sign up for this because it is a good way to help monitor your activity.
LowCards.com ( http://www.lowcards.com ) is an independent website that helps consumers easily compare credit cards in a variety of categories such as lowest rates, rewards/rebates, and lowest intro rates. It also gives and unbiased ranking and review for each card. Created by Hampton & Associates, the company has been analyzing the credit card industry and supplying objective websites on various consumer expenses for over six years.
"Even though credit card disclosures are difficult to read, cardholders need to educate themselves and to understand the terms of their credit card. Not understanding all of the terms of a credit card can be costly," says Bill Hardekopf, CEO of LowCards.com. "One of the easiest places to start is the credit limit, yet 13% of cardholders paid a high fee for exceeding the credit limit last year. Even worse than the late fee is the default rate of over 30% that you may receive if you go over the credit limit. These can be avoided if you understand what your credit limit is, how to easily monitor your credit limit, and how you can control your credit limit."
The credit limit is the maximum total amount--for purchases, cash advances, balance transfers, fees, and finance charges--you may charge on your credit card. The limit is determined by credit score and payment history. The better your score and history, the higher your credit limit will be. Credit limits range from $200 to 50,0000 or more.
"Credit limits are an indication of how the credit card issuer judges your credit-worthiness and their assumption about how you will use their card. The opinion and credit limit may vary by issuer. You may even get different credit limits from different issuers," says Hardekopf.
The credit limit you receive with your credit card is not fixed forever. The issuer regularly monitors your account; if you build a good credit history and pay on time, you may request a higher credit limit, or the issuer may automatically increase your credit limit. To request a higher limit, contact your issuer. You will have to provide income information and employment details, as well as information on assets and liabilities, loans, and other credit cards. They should be able to do this without pulling your credit report. If they have to pull your report, they should let you know first.
However, if the issuer automatically increases your credit limit, this does not mean that you can afford it. This is not like receiving a raise, and it doesn't give you permission to spend more. If you carry a balance, a higher credit limit means the opportunity to increase your debt balance and the amount you will have to pay them.
"Credit card companies positively promote credit card increases as the freedom to buy the things you want, when you want. However, if you already carry a high credit line increases. You don't need to add more debt, you need to pay down what you have," says Hardekopf. "Just contact the issuer to decline it."
Issuers may also decrease your credit limit. They not only monitor the account you have with them, but the accounts you have with other creditors. If you pay late, bounce a check or get a big loan, your credit card limit may be lowered. They should notify you about the new limit, but it is a good idea to look at your credit limit and balance each month to make sure nothing has changed, and to make sure you are well under the limit.
It is a good idea to leave plenty of room in your credit line. Credit utilization is important to creditors, and it is a large factor in 30% of your credit score. This is the formula for calculating credit utilization: total amount of debt on credit cards and revolving accounts divided by the total amount of debt available on those cards. The lower the fraction, the better your score. For example, if you have $3,000 in debt and $10,000 in credit lines, you are using 1/3 of your available credit. It is a good idea to keep your debt at about 30% of your credit limit. If your score is 1, you have maxed out your credit cards.
Don't assume that your card will be declined if you go over your credit limit. Many issuers will allow you to make purchases beyond your credit limit, but you will have to pay a high fee for it. Many issuers now offer email updates when you are nearing your credit limit. Sign up for this because it is a good way to help monitor your activity.
LowCards.com ( http://www.lowcards.com ) is an independent website that helps consumers easily compare credit cards in a variety of categories such as lowest rates, rewards/rebates, and lowest intro rates. It also gives and unbiased ranking and review for each card. Created by Hampton & Associates, the company has been analyzing the credit card industry and supplying objective websites on various consumer expenses for over six years.
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