Studies have long suggested that people have a tendency to spend more when they’re using credit cards compared to when they’re using cash. On top of going for more expensive items, the urge to resist impulse buying is more difficult and people tend to give larger tips when using their credit cards to complete their transactions.
There are different hypotheses as to why this happens. Some researchers think that using credit cards reduces the pain of spending, while others think that this form of payment motivates one to spend more. Regardless, people must use this avenue of payment in a more conscientious manner to avoid getting too deep into debt.
An effective way of keeping your spending under control is being mindful of your credit card limit or the maximum amount of money you can spend using your credit card. Here’s what you should remember when it comes to your credit card limit.
Your Credit Card Limit Is Affected By Many Factors
There are different factors that affect the limit of a credit card Philippines banks typically issue. Some banks can issue credit cards that belong to different tiers, each with a cap on the amount that a person can spend. Aside from these, the issuing bank will also take some of your details into consideration when determining how much credit they are willing to extend to you. These factors can include your annual income, credit score, credit history, and the number of credit cards under your name. Just like any lender, credit card issuers aim to get back the money they lend out. As such, they’re willing to give bigger credit to people who have been deemed creditworthy or those who are more likely to pay back what they owe in full.
Exceeding Your Credit Card Limit Can Lead to Fees and Penalties
Your credit card limit is more than just an imaginary number, as exceeding it can have tangible as well as financial consequences. Going beyond your limit due to sudden financial need, for instance, can lead to a transaction denial, meaning you won’t be able to pay for whatever you’re attempting to purchase. If you’ve opted into paying an overlimit fee, then the transaction might not be declined. However, you’ll be charged extra on top of the amount of the transaction that exceeded your credit limit. In some places, it’s also possible for the lender to increase the interest rate of the credit cards under your name.
The Limit Is Not a Suggestion of How Much You Should Spend
It’s unwise to see your credit card limit as a challenge of how much you need to spend before you stop. Think of it as a hard stop, that your credit card will no longer work once it reaches this particular number. Pausing way before you reach your credit card limit is a good idea, as maxing out your credit card isn’t exactly doing your credit score any good.
If you find yourself frequently maxing out your card but have no trouble paying your bills back at the end of every period, then getting a credit card with a much higher limit might serve you better than the one you have now. Applying for one is a more practical and smarter option than exceeding your limit and paying overlimit fees repeatedly at the end of every billing period.
You Have to Be Aware of Your Credit Card Utilization Ratio
If you want to improve your credit score by using your credit card, then utilizing just 30 percent of your credit limit will do the job. This is the percentage experts recommend to people who want to demonstrate their fiscal responsibility to their credit card issuers and future lenders. If you keep your credit card utilization ratio low, you’ll have an easier time paying your bills and minimizing your balance at the end of every billing period.
Going Past Your Credit Card Limit Can Damage Your Credit Score
Making a habit of exceeding your credit card limit can damage your credit score and make it more difficult for you to gain access to financial products and services in the future. Coming back to the concept of creditworthiness, banks observe how you use the credit line that is given to you. If they notice that you’re not using it well–by going over your budget and exceeding your limit frequently, for example–then that does not demonstrate fiscal responsibility. This will make them reluctant to increase your credit card limit or approve your loans in the future.
Owning a credit card is a practical way of accessing money in times of emergency or sticking to your thoughtfully crafted budget for the month. It’s important to remember that you shouldn’t let it become a reason for spending more money than you have to. Every time you feel tempted to max out your card, remember these things about your limit and try to find better ways of using the credit that has been granted to you.