A New Debt Peak

Are you aware of your credit card limit, the total dollar amount that your credit card issuer will generally allow you to spend without involving penalties, fees, or declined transactions? If you do not spend anywhere close to your limit, you may not care about it – but you should. Your credit card limit plays a role in your credit score, and vice versa.

According to data from Experian, one of the three major credit bureaus along with Equifax and TransUnion, the average credit card limit in the U.S. as of December 2016 was $8,071. However, average credit limits vary greatly with cardholders’ credit scores.

Borrowers with Deep SubPrime credit, defined as a credit score of 300-499 on the VantageScore system, have an average credit limit of $1,834. On the other end of the scale, borrowers with SuperPrime credit (credit scores above 781) merit an average credit limit of $11,357. SubPrime credit (credit score 500-600) cardholders have an average limit of $2,645. NonPrime credit (601-660) produces an average $4,674 limit, and Prime credit (661-780) yields an average limit of $7,593.

It’s reasonable that those with lower credit scores have average lower credit limits, based on the risk of non-payment. Credit scores are derived from your credit report, which contains information on your record of borrowing and repaying money. If you have a demonstrated history of missed or late payments, you pose a greater risk to a lender – therefore your credit score will be lower and your credit limit will follow suit. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips

Are you still wondering why you should care if you spend well below your limit? If you have a credit limit that is lower than your credit report and spending habits should warrant, you may be missing an opportunity to get a higher credit score simply by asking your card issuer to raise your credit limit. Along with improving your credit score, you increase the chances for better offers on future credit cards and loan qualifications because of lower credit utilization – the amount of credit you are using compared to your credit limit.

Payment history is the factor that contributes the most to your credit score, but another large portion is determined by credit utilization. Experian’s Director of Public Education, Rod Griffin, describes their findings: “What we found is that people with the very best credit scores have utilization rates of less than 10%…One of the numbers you’ll hear out there is 30% – that’s really a maximum.” Missed or late payments will always ding your credit score, but that behavior causes even more worry to a creditor when you are near your credit limit.

A recent study by CreditCards.com found that only 28% of cardholders have ever asked for a credit limit increase, but that 89% of those who do receive an increase. With a good history, a card issuer is likely to see more reward than risk in increasing your limit, expecting that you may incur more interest charges without risking an unpayable debt spiral.

If your credit is too shaky to ask for a credit limit increase, improve your credit score the old-fashioned way: limit your expenses and pay down your debts with regular, on-time payments. You can expedite the process if you qualify for a balance transfer card that allows you to use an introductory 0% APR period to pay down debt without incurring interest charges. April Lewis-Parks, Director of Education and Public Relations for Consolidated Credit, illustrates with the example of a person with $4,000 in debt on a card with a $5,000 limit. “If they take that debt and transfer it to another card that has a higher credit limit (say $10,000), that $4,000 is much lower percentage-wise and that alone will raise their credit score.”

Keep in mind that this strategy fails if you use your higher credit limit as an excuse to spend more money. Be proud of your large credit card limit if you like, but be even prouder of your relatively low spending, low credit utilization, and high credit score. Creditors will be proud of you, too.

This article by Melissa Pedersen first appeared on moneytips.com and was distributed by the Personal Finance Syndication Network.