Know Your Limit

When you get a credit card, it comes with a credit limit — the maximum the bank or other company issuing the card is willing to let you owe at any one time. Companies calculate this limit based on their formula for determining how much they think you can pay back, depending on your income, your past history of paying your bills, and other factors. One company may determine it can give you a limit of $500 while another might approve you for $2,500.

However, just because you can borrow up to your limit doesn’t mean you should. Obviously, if you can’t afford to pay off your bills in the foreseeable future, you shouldn’t be putting more charges on your card. But the reality is that a lot of credit card companies utilize automated computer programs to determine the amount and timing of credit limit increases that they may approve for you. In fact, these increases are often granted automatically. The risk is that your limit could be increased to a level that’s more than you can afford to owe, based on your income. If you find yourself in this situation, you can ask your card issuer not to increase your limit, at least for the present. That way, you may be less tempted to overspend.

Finally — and this is an important point to remember as you try to get off on the right foot financially — charging up to your maximum limit has a negative impact on your credit score, which can have far-reaching effects on future financial decisions.