How to set the right credit limit for your credit card
Choosing the right credit limit on your card means figuring out how much you need to spend on the card each month and how much you can afford to spend.
Key takeaways
- The credit limit is the maximum amount you can spend on a credit card. With some applications you can choose your limit, but ultimately the card provider sets it.
- A high credit limit means you can spend more freely on the card. But you could also end up with a bigger debt if you don't repay your balance in full.
- You can usually request a lower credit card limit. This can even improve your credit score.
What is a credit limit?
Credit cards often have a minimum credit limit, which is the lowest amount of credit you can get approved for on a particular credit card. And a maximum credit limit, the highest amount of credit you can get approved for.
The average credit limit for a credit card in Australia is $9,989, according to Finder analysis of Reserve Bank of Australia data.
How to choose a responsible credit limit
Not all credit cards list a minimum and maximum credit limit. But when they do, it means you can request an amount that sits within that range.
Here are some tips to help you decide on the right credit limit:
- Estimate how much you'll need to spend on the card each month. If you'll be doing most of your spending on this card then it's a good time to review your spending and set up a budget. If you spend roughly $3,000 a month on groceries, fuel, bills, entertainment and other life expenses, then that's a good starting point.
- Use a repayment calculator. If you pay off your balance in full each month you won't have to pay any interest on your card. But if you carry a balance, you will. Use Finder's repayment calculator to look at different scenarios and costs. This will help you figure out a responsible credit limit.
- When comparing cards, use the minimum and maximum credit limits as a guide. If a card has a very high max credit limit it might not be the right card for someone looking to spend about $1,000 a month.
- Your credit limit isn't set in stone. You can always request a credit limit increase if you want a higher limit in the future. Requests for an increase are subject to credit approval. You can request a lower credit limit at any time, but it can't be lower than the card's minimum credit limit.
- Many card companies determine your credit limit for you. You can just apply for a credit card and let the card company set the limit for you. If you have a Good or Excellent credit score and reasonable income you'll likely get a higher credit limit than you need. And you can lower it later.
Expert insight: Setting your limit wisely
"Whatever limit you choose, you should always feel confident that you can make your payments on time, every month. You might be tempted by a higher limit, but don't forget it brings a greater risk of overspending and falling into debt. If you don't manage it well - for example, if you regularly miss payments - it can hurt your credit report and credit score. Choose a limit that you know won't lead you astray."
What kinds of credit cards have high or low credit limits?
Lower limit credit cards
Cards with lower credit limits (between $500 and $2,000) may offer more competitive fees or interest rates. These cards are suited to people who may not be making large purchases or spending on their credit card regularly.
Higher limit credit cards
More premium cards with extra features, rewards programs and higher fees generally offer higher credit limits, and they often come with a minimum credit limit of around $15,000.
What is the risk of choosing a high credit limit?
Overspending
A higher credit limit makes it easier to overspend. If you took out a credit card to cover $2,000 worth of monthly expenses, but the card has a $5,000 credit limit, then that's a lot of extra money you could be tempted to spend.
Setting a responsible credit limit is partly about understanding your own money habits and personality.
Harder to get other loans or credit approved
Having a high credit limit on your card makes it harder to get a home loan, personal loan or a second card approved. The bank factors in your total credit limit rather then your debt when calculating your borrowing power.
Some home buyers lower their credit limit a few months before applying for a home loan to increases their chances of approval.
Can lower your credit score
A high credit limit can impact your credit score, as banks and lenders consider you to be riskier if you have a high amount of unsecured debt, such as multiple credit cards.
Could you manage your finances without a credit card?
74% of Australians surveyed said they could manage their budget without a credit card, according to our consumer sentiment tracker (November 2024 data). A credit card can be useful for managing your spending and earning points if you pay it off each month but it's risky to rely on a credit card when you can't afford to pay back what you spend. Interest charges will add to what you need to pay off and some cards have interest rates around 27% for purchases.
Sources
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