Money recently launched Dollar Scholar, a new personal finance newsletter written by a 27-year-old man who is still finding out: me.
Each week I will talk to experts about a money question I ask myself, namely “Are online banking sketchy?” or “how many credit cards do I need?” As I learn, I’ll share easy ways to improve your financial life… and post some fun memes.
This is (part of) the sixth number. Find out below, then subscribe to get future editions of Dollar Scholar every Wednesday.
Here is a short list of things I know a lot: Yorkshire Terriers, Renaissance art, young adult literature, Vine compilations, Millennium Voters, mid-2000s teen TV shows, memes and the Elvis-is-alive conspiracy theory. Here’s a shorter list of things I DON’T know much about: credit.
Despite my best efforts, I am still learning the ins and outs. For example, I’ve written about my credit score before, but I’m a little confused as to how the credit bureaus operate and what makes an investigation difficult or soft.
Rod Griffin, director of consumer education and outreach for Experian, called me to explain the basics. He said credit limits are what they look like: They refer to the maximum amount a person can charge on a card. The credit card company sets the limit; the customer has to follow it.
Unfortunately for my eyeliner and black polish, there isn’t really room for rebellion. If I go over the limit, Griffin told me that either my purchase will be refused or I will have to pay an overage fee (ingeniously named).
Illustration by Jade Schulz
It is in fact an interesting federal law. The credit card act of 2009 – we’re killing it with names, guys – only restricts the amount businesses can charge to go over the limit. It also caused customers to opt for over limit coverage.
President Barack Obama enacted the law, and it apparently had the desired effect: the Consumer Financial Protection Bureau discovered in 2015 that the law had helped people avoid some $ 9 billion in over-limit fees.
Thanks, Obama. (Truly.)
However, that doesn’t mean it’s okay to spend recklessly. As Griffin says, “There is a lot to know about credit limits and your credit in general. “
One of the factors that influences a person’s credit score is their usage rate, which is calculated by dividing the credit you use by the credit you have. Griffin said your utilization rate should always be below 30% – AKA, it should stay way, very far from your limit.
It is possible to increase your credit limit, which decreases your usage rate and theoretically increases your score. In fact, Griffin said it often happens automatically. I checked and of course my credit limit has been increased twice since 2016 without asking. Soft.
You can also request an increase in your limit – sometimes it’s as simple as clicking a button on your card company’s website. But that’s not always a good thing. Griffin said it could be treated as a serious investigation into your credit report, which in turn could hurt your score. In addition, it could lead to bad spending habits.
“The challenge comes when a person asks to increase their credit limit because they are maximizing their credit cards, because they are abusing them,” he says. “They are billing the maximum consistently and are looking for a way to reduce their debt.”
If you have a case like this, Griffin said it might be better to focus your efforts on payments to lower your balance rather than asking for a credit limit increase.
In what scenario would it make sense for someone to request an increase in their credit limit? If you regularly deposit your card for business expenses and find yourself near the limit waiting to be paid off, this might be a good idea.