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Can a big credit limit hurt you?
It is not a secret that every credit card has its limit – the maximum amount of money that you may borrow on your card. Credit limits have some important advantages. For example, they help you not to get too far into debt, and they also allow credit card issuers to control how much money you can borrow.
A credit limit is a reflection of your credit worthiness. In general, the better your credit history is the bigger credit line you can get. People who have a good credit will qualify for better credit card offers than people with no or bad credit.
Some credit cards issuers give their customers big credit lines initially. Other banks will increase your credit limit gradually depending on how well you manage your debt.
It’s necessary to realize that big limits can ruin your successful financial life. If a credit card issuer sees that you make timely and full repayments, your credit line will be increased, often automatically, no matter whether you can actually afford it or not.
Many customers regard a credit line increase as a signal to spend. If you have more money available, it means that you can make more purchases. An ability to spend more makes you accumulate more debt. That is the trap of increasing credit lines.
Nowadays many credit card customers have more available credit than they actually need or can manage. Spending more than you can afford makes you up to your eyes in debt. You can end up paying off your balance for a considerable period of time.
Moreover, keep in mind that credit bureaus calculate the ratio between your credit card balances and total available credit. If you borrow too much, the percentage of debt/available credit will increase. It will lower your FICO score. If you have a debt, try to keep it less than 30% of your available credit.
So, think twice before accepting offers of credit line increases. Regard open credit lines as a potential debt. Banks don’t know your financial situation. Only you can determine if you can afford the additional debt and additional payments.
Turning down a credit line increase is easy. All you have to do is to contact credit card issuer by phone or in writing and inform it of your decision. Reducing your credit lines won't enlarge your credit score, but it will tell a lender that you are a responsible credit card holder.
If you want to leave a substantial credit limit for emergencies, I know a way not to borrow money on a credit card. Establish an emergency fund. That way you will have money to pay for unforeseen big expenses like medical care or a car repair. Without an emergency fund, that spending can boost your credit card debt. Any amount of cash you can tuck away is a good start. Having the savings is a very important part of managing your money properly. Any amount matters. Having some cash in reserve for unexpected expenses, you will ensure your successful financial life.
