Beware of Credit Card Limits
Credit card limits are rarely static. It is not uncommon for many consumers to open up their credit cards monthly statement only to find that the card company has increased the credit limit on the card without the holder’s knowledge or permission. For most people this is not a big issue, but it can be for some.
In order to fully appreciate how this works one must understand two things. The first is a basic lesson on credit scores and the second is a term called debt to credit ratio.
Most people understand that their credit score is important, but many people do not really understand just how important the credit score is as it pertains to future interest rates. Future interest rates are the rates that lenders will offer you, in the future, for any loans that you may wish to take out, in the future. If you have a high credit score, meaning you are diligent with paying your bills and have not used up too much of your available credit, you will get the best rates for future loans. On the other hand, if your credit score has fallen you will not get those better rates and be faced with high-interest loans should you ever need them.
So what does this have to do with increased credit limits? Once a credit limit has been increased many consumers feel the need to use up that increase by charging more things to the credit card. Two things can happen here. One is the payments may become so large that consumers start making late payments. This will certainly bring your score down if done too often. Secondly, you can actually lower your overall credit score if you max out a card that has an increased credit limit.
This is where your debt to credit ratio comes into play. In simple terms, your debt to credit ratio is calculated by how much debt you currently owe, divided by the total amount of credit that has been approved for your use. The more debt you owe the more negative this ratio becomes. Keep in mind this debt includes all of your debt, not just credit card debt.
Another way to put this is that when a credit card company raises your credit limit, you can improve your credit score as long as you do not significantly increase the amount of debt that you currently owe.
The main tip is to make sure that you do not fall into the habit of using the extra credit if there is any possibility that it will cause you to be late on payments in the future. Also, if you are already close to being maxed out on your debt to credit ratio refrain from using the extra credit as this will only make your ratio worse. You can order a copy of your credit reports and credit score online if you wish to do so. This is a great place to start when trying to improve your overall credit worthiness.
