A credit card limit refers to the maximum amount of money that you, as the cardholder, can spend on the card in total. There may be a daily spending limit or other similar limits placed on the card, but the credit limit is the total amount of credit you have available to accumulate on any one card.
When you apply for a credit card, you’ll likely be asked about the credit limit, and the amount you choose could affect whether you’re approved for the card. You may ask for a certain credit limit, but that doesn’t mean the card issuer will actually give you that amount.
Your credit limit is determined by the credit card issuer and based on your financial situation. All credit cards in the market also have minimum and maximum credit limits that card issuers allow for that particular card, so it’s best to check these before applying. Cards with substantially higher maximum credit limits may also require you to earn a minimum income for you to apply for them, which is why it’s usually best to compare credit cards before applying.
Remember that credit cards lend you money that isn’t yours and require you to repay it within a certain period, or you’ll be charged interest. It’s often a good idea to try and get a credit limit that’s in line with your financial situation and won’t tempt you to overspend. Consider an amount that you can afford to repay in full each month to avoid carrying a balance on your card and accumulating interest and, therefore, more debt.
If you are offered a higher credit limit than you think is necessary, you can request for it to be lowered. Decreasing your credit card limit can benefit you when trying to take out other types of credit, like when you apply for a home loan. Decreasing the limit can also prevent you from being tempted to use that additional credit and therefore get into a level of debt that causes financial stress.
When assessing you for other forms of credit like personal or home loans, lenders may use your credit limit rather than the outstanding balance to calculate your borrowing capacity. This means they’ll assume your credit card is maxed out and calculate your liabilities as if you have to repay that full amount. So if you have a credit limit of $5,000, but you pay off the balance each month, it doesn’t matter. When assessing how much they will allow you to borrow, a lender will assume the whole $5,000 as a liability rather than see how the card is used. This could then lower the amount you might be able to borrow for a house.
The other possibility could be that you’re approved for a lower credit limit than you needed or wanted. A higher credit limit may seem desirable, but it may not be the best option for you. If there is a specific reason you require a higher limit, like a specific purchase, you could discuss this with the card issuer or work on reducing your other liabilities to increase the limit later.
Always remember that just because you can have a higher credit limit doesn’t mean you should. Ensure you balance all the pros and cons of having a higher credit limit before you apply for one.