By Sybria White
on July 30, 2010
A Credit Limit, as defined by investorwords.com, is “the maximum amount of credit that a bank or other lender will extend to a customer, or the maximum that a credit card company will allow a card holder to borrow on a single card”1
As the above example explains, almost every credit card you will use will have a credit limit. Therefore, when using any credit card it is important to always be aware of your credit card limit. It is an important boundary that can affect your credit score. If you reach your limit
and attempt to use your card anyway, your credit score may be impacted in a negative way.
Advantages of a Credit Limit increase or Large Credit Limit
It is very easy to see the advantages to having more access to funds, on the surface. Who doesn’t want more access to money? An increase in credit can lead you to more purchases. If you had some sort of emergency, in which you needed immediate access to money, a large credit limit is ideal. However in many cases a higher credit limit may hurt you, rather than help you.
Disadvantages of a Credit Limit Increase or Large Credit Limit
When you do finally reach your credit limit, it is very tempting to apply for a credit increase. You have been spending borrowed money for quite some time or you have used it as a safety net. Even after having a safety net for just a short period of time, it is easy to get accustomed having one. But it is important to remember that automatic credit increase or requests for credit line increases, can lead to more credit that you could ever need or can handle2
. This could be a method by the credit card company to dig you further in debt. Increasing your limit periodically just gives you an incentive to spend more borrowed money. Instead of relying on the security of a large credit line, it is better to come up with your own “cash cushion” for unexpected expenses
Your credit is more than the maximum amount you are allowed to borrow; it is your company’s evaluation of your credit history.2
You are offered higher credit limits based on your credit history.2
If you are perceived as a valuable customer, in other words, you are profitable to the credit card company. The credit card company offers you more money, and it is more than likely, that a debt cycle will begin. It is advisable to learn to use credit only when absolutely necessary and to always be aware of your credit limit.