Credit cards are revolving accounts, meaning that you do not borrow a fixed amount of money and repay it in equal increments for a specified length of time. You get a spending limit and use it whenever you wish, as long as you are working with a merchant or service provider who accepts that type of credit card. Your ideal limit varies, depending on your personal financial circumstances.
Your credit limit affects your purchasing power. You are allowed to spend up to the limit, and some banks let you exceed it if you give them permission to do so, according to the Board of Governors of the Federal Reserve System. Most charge an overlimit fee. Otherwise, the transaction is denied and you cannot use the credit card again until you make enough payments to free up some of your credit line. A good credit limit is high enough to accommodate your purchase needs, with a little space built in for emergencies like unexpected car or home repairs or dental bills.
Your TransUnion, Experian and Equifax credit reports show your credit card balances and spending limits. Lenders processing applications for new accounts do not like to see maxed out credit lines, and the MyFICO credit scoring site advises that part of your score comes from the difference between your balances and remaining credit lines. A good credit line is high enough to let you buy what you need without coming too close to the limit.
Credit cards can be paid in full every month, or you can pay a smaller amount every month until you wipe out the balance. Interest accrues monthly, so part of each payment goes toward the interest charges. Your bank designates a minimum required amount, and you are free to pay more if you want to save on the interest or pay off the total more quickly. A high credit limit may tempt you to overspend, so your credit limit should be low enough to allow you to pay at least the minimum every month, even if the card is maxed out.
When you are approved for a credit card, the bank assigns you a credit limit based on factors such as your income level, other accounts and overall financial history. Some banks periodically raise the limit for good customers unless you refuse the increase. Shelly Banjo, a "Wall Street Journal" website writer, warns that your bank can reduce your limit if it wishes, even if you have a good credit rating and are happy with the credit line. This may hurt your credit score by unfavorably affecting the ratio of your balances to available credit.
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