The Top 3 Myths Surrounding Your Credit Limits

by : Court Tuttle

Sometimes when you think of limits, you think of restraint. Like with credit cards, the companies set a limit on how much money you can spend before you are penalized for spending too much. Some people want to know what the limits are just so they can get as far as possible without going past them.

Knowing and keeping within your limits, when it comes to spending money with a credit card, is very wise, and can benefit your credit score. It allows us to control our spending and discipline the way in which we use credit. Still, there are some things that are often misunderstood about our credit card limits that can lead to huge amounts of debt and no way to get out.

Here are a few things to avoid when setting your credit limits:

1. Having A High Credit Score Will Allow You More Freedom.

Freedom is only a gift if it is used wisely, but if it is used foolishly, it can turn into a burden. Just because you have the ability to set your credit limits to the maximum amount doesn't mean that you should.

You should only set your limit to the amount that you know you could pay back if you ever spent it. That way you will not be burdened by debt just because you were tempted to spend within your limit, but beyond your means.

2. Having Your Credit Card Limit At the Maximum Amount Is a Good Thing.

Having a high credit card limit, when it is not necessary and especially when it is not affordable, can have a domino effect that will eventually damage your credit score. When you have a high limit, it is more likely that you will spend beyond your means, just because you think it is okay as long as you stay within your credit limit. You always have to pay back what you borrow, and today we cannot escape interest rates.

When you spend more than you can pay back, you may end up having to pay more monthly. If you cannot afford to pay more, you end up paying it late, or not paying the full amount. This will lead to high interest rates, which will make it even more impossible to pay back the actual debt, not to mention the ever-climbing amount you owe in interest alone.

3. Pre-approval On Overextending Your Limit Will Not Lower Your Credit Score.

Just because you called in and made sure that it was okay with the credit card company that you could spend over your credit card limit doesn't mean that you will not be punished for it. Your credit score will decrease substantially because it is not determined by whether you can approve overspending, but whether or not you can stay within your limit. Your limit is set as a boundary for you to spend within, not a rule for you to see if you can break.