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Ask any credit adviser, they will name quite a number of reasons for why credit cards are better than cash. One of the major ones is that credit cards grant you freedom. But this freedom is not boundless. Your financial freedom ends together with your credit limit.

The maximum amount of money that you can borrow depends on your credit history and credit score. If you have proved to be a creditworthy and reliable credit card holder, you will get a higher credit limit than a customer with bad credit history. And a high or no credit limit is sometimes even a more hunted-after feature than high cash rebates or low APR. But is it so good to have a high credit limit?

Why does everybody want a big or no credit limit? Even Chad Kroeger from Nickelback sings "I want a credit card that's got no limit". The thing is that with a high credit limit you can spend more money and this will not damage your credit score.

However, having a credit limit, and not even a very big one, gives you a number of advantages. A credit limit, first of all, gives you control. Control of the money you can spend. This way you can better learn to manage your finances right. While with unlimited buying power you will get easily used to blow your money. But will you be able to pay off your debt afterwards?

But could you ever think that a no-limit credit card, for instance, can damage your credit score really bad. It can drop 40-50 points or more. How come? Credit utilization is one of the key components of your credit score. This is the ratio of your actual credit card debt to your potential credit card debt. Your credit utilization is calculated in percents. Say, your credit limit is $ 15,000 and your balance is $ 7,500, your credit utilization makes up 50%.

When you have no limit on your card, credit bureaus just cannot calculate your credit utilization, which results in the decrease of your credit score. This is what concerns no-limit credit cards.

As for credit cards with high credit limit, they can also cause financial problems. A big credit limit is an extra temptation to overspend. You know that you can spend a lot of money and you will not get penalized for that. So, you can start buying more and more. But will be able to pay off your credit card debt afterwards?

Credit card companies know that and they easily grant their customers such a "bonus" as an extension of a credit line for good financial behavior. People with good credit card deals can get a bigger credit limit just immediately as they purchase a credit card. But this cannot be called as an exclusive option only for card holders with good and excellent credit. Bad credit card owners can also count on getting a bigger credit limit in case they accurately pay off their debts and prove a creditor to be responsible credit card users. Your credit limit can even go up automatically.

So, do not rush to accept the extension of your credit line. Only if you really need to make a large purchase and if you are 100% sure that you can afford paying down your balance, you can agree to get a higher limit. In case you decide that you do not need this big credit limit, just contact your lender and inform them about your choice.

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Comments

Philippe Kent, 05:55 AM, May 26, 2008
hmmm.. I woudn't mind having a credit card that can give me all I want. who cares about credit score when doing 150 on a freeway in your brand new Ferrari?)))

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