Although credit cards have many advantages, such as providing a financial cushion in case of emergency, helping establish credit scores or accumulate rewards – they have limits, which vary depending on several factors. Exceeding these can trigger a host of short- and long-term consequences, but Americans seem to be aware of this fact and are acting accordingly, according to a new survey.
A credit card limit – the maximum amount you can spend on your credit card – can start at a few hundred dollars and go up to tens of thousands of dollars, depending on criteria such as payment history, checking accounts, account history, debt and income, according to Chase.
A new GOBankingRates survey found that 40% of Americans have never reached their credit card limits.
“It’s not surprising, given that most cardholders have sufficient credit limits relative to their spending levels,” said Charlie Wise, senior vice president and global head of research and consulting. at the house of Trans Union. “For all US cardholders, the average usage – balance over credit limit – on all cards in their wallet is less than 20%. And for super premium cardholders – those with the best credit scores, more than 40% of all credit card holders – usage averages are less than 10%.
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Wise added that many cardholders with lower credit scores have lower credit limits and therefore higher usage.
“These cardholders are more likely to have reached their card limits during months of heavy spending,” Wise added.
Howard Dvorkin, CPA and President of Debt.comechoed the sentiment, saying the 40% figure is unsurprising because consumers with the highest credit limits have the best credit scores.
“Credit card issuers aren’t going to give you a $20,000 limit if you’re a bad risk,” he said. “So they watch your credit score carefully. This is because people with high credit scores reliably pay off their debts, which means they are financially responsible. The last thing they want to do is max out a credit card unless absolutely necessary.
How do Americans avoid reaching their limits?
More than a third of Americans — 37% — say they fully pay off their balance each month, while 19% say they pay more than the minimum but never the full balance, and 12% say they never do. than the minimum payment, according to the GOBankingRates survey.
Ben Reid, CEO of M1 expenditure, explained that a general rule is to use no more than 30% of your credit from all sources. Anything over 30% will start to negatively impact your credit score, and many tips suggest aiming for significantly lower than that.
“The absolute best way to keep your balance under control and, more importantly, avoid high interest charges,” Reid said, “is to pay off your statement balance in full each month, ideally through Autopay. so you don’t have to think about that.”
However, the GOBankingRates survey notes that Americans rarely use autopay or a third-party app, as only a measly 0.90% report using these tools to monitor their balances.
Another rarely used way to avoid hitting credit card limits is to raise the limit before it’s crossed, as only 3% say they’ve done so.
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This meager figure is not surprising; Applying for a credit card limit increase can be overwhelming. Experian explains that while each card issuer has specific guidelines, in general you need to have had a card for at least six months and not have requested an increase in the past six months.
Additionally, before a credit increase can be granted, you will need to demonstrate that you are a responsible cardholder (no late payments or over-limit purchases), that your credit is in good condition, and that your income are enough to cover monthly housing and debt.
Jason Vissers, credit card analyst at MerchantMaverick.comsaid the best way to avoid hitting your limit “is to pay for your expenses by means other than your credit cards, control your expenses, and/or obtain multiple credit cards in order to increase your total amount of credit available”.
Why You Should Avoid Reaching Your Limit
There are a multitude of negative consequences for consumers who reach their limits.
“Most likely, any charges to your card that are attempted will be declined if they put you over your credit limit,” Vissers said. “If you have over-limit protection, which many cards don’t even offer, the fee may apply, but you’ll likely be penalized with additional fees and/or penalized with a reduction in your limit. credit or an increase in your interest rate.”
Another potential consequence of going over the limit is that it could affect your credit score and cost you a lot of money in interest.
“It is possible that you will reach your credit limit and pay the full charges before the interest accrues, but even then there could be significant damage to the credit score, because the credit usage — the credit you use divided by the credit you have — is typically reported on your reporting date,” said Ted Rossman, senior industry analyst at CreditCards.com. “Credit usage is a big part of ‘how much you owe,’ a category that altogether comprises 30% of the FICO scoring formula. For a lender, maxing out a credit card looks like very risky behavior.
Rossman said that — even if you’re able to pay in full to avoid interest — look to keep your credit utilization rate low by making extra payments throughout the month.
“I like to pay my cards every 1-2 weeks to control my usage and stick to my budget,” he said. “You can also ask for a higher credit limit, but make sure you don’t use that as an excuse to overspend. I’m surprised a lot of people have maxed out on a credit card. It’s a final credit no-no.
The first step is to know your limit
Finally, while it may seem obvious, the first thing to do is know your credit limit, said Tomas Campos, co-founder and CEO of spinning wheel. His company’s internal research shows that about 65% of cardholders don’t know their credit limit on their cards.
The second is to understand how you use your credit cards. For example, consider whether you are a “dealer,” a cardholder who pays off the balance monthly, or a “revolver” who relies on credit limits to supplement cash needed to pay expenses.
Campos also notes the negative consequences of exceeding the limit, which can sometimes trigger before you even reach your limit.
“Once you exceed 30% of your total credit card limit, there is a risk that your credit score will drop,” he said. “Beyond that, there are almost always expenses that arise that are not taken into account.”
Campos added that if you get close to your credit card limit and end up going over it, your rates could end up going up and credit card companies could decline over-the-limit transactions.
“Sometimes there are significant consequences that could, in turn, lower your credit score, drive up your interest rate, and ultimately make future borrowing less than ideal,” he said. -he declares. “That’s why it’s better to take a comprehensive look at all of your debt to come up with a smarter debt management plan – and it allows you to take control of your debt.”
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This article originally appeared on GOBankingRates.com: How 40% of Americans Avoid Reaching Their Credit Limit
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