Credit Card Debt Limits and Your Real Limits
Liz Pulliam Weston writes the great Money Talk column for the LA Times. This week, she’s answering some questions about credit card debt limits and what your real limits should be.
Your credit card debt limit line can be a dangerous one to cross. Exceeding your credit limit can trigger an avalanche of fees, penalties and raised rates that can quickly turn a little debt into a lot.
But, Weston writes about a lesser known credit issue: Coming close to your credit limit.
Credit card companies view people who come close to their limits as credit risks and more likely to default, she writes:
“That’s why it’s prudent to use as little of your credit as possible — less than 30 percent of each limit is good; less than 10 percent is better.”
If you approach your credit limit, the credit card companies may take action, like increasing your rates. Also, your credit score may be affected.
She says this is good advice even for people who pay off their balance each month, because the credit score agencies will still see that you spent close to your limit.
Aside from the credit ramifications, using only a portion of your available credit is good practical advice. Using less than the maximum allows you to:
- Save some spending power in case of emergency
- Reduce the amount you are spending in interest payments
- Keep your debt within reach
I also like how Weston gives this advice even for people who pay off their balance each month. This isn’t a good system for me, and I find it’s a little too easy to say “I’ll deal with that later” and leave a little on there.”
But by lowering that bar you are giving yourself even more breathing room. Having a margin for error is a big part of staying out of debt traps. But if it’s too late and your debt is aleady unmanageable, then you may want to consider how Chapter 7 bankruptcy can help.