How much can you charge on your credit card?
What amount to charge on your credit card?
If you have a credit card, it could actually make life more convenient for you as the card can be used to pay bills and settle other financial obligations without necessarily carrying cash. Besides, it is a good tool that you can use to build your credit score if you use it responsibly. You need to understand that the fact that you have a credit card does not mean that you can use it to make all your purchases. You should know where to draw a line when it comes to what you use the card to buy or pay for. The question is, how much can you charge on your credit card? The answer to this question is relative and can be peculiar to individual card user. Two people can be carrying the same type of credit card and still, it may not be safe for them to charge the same amount to their cards. There are some factors that will guide you on the amount that will be appropriate for you to charge on your credit card. In fact, this is the thrust of this article.
Factors influencing the amount to charge on credit card
Credit Limit: When you get a credit card, a credit limit will be imposed on you based on how much the card issuer think that you can safely manage and be able to pay back. Credit limit represents the maximum amount you can owe on your card per time. Some of the factors that credit card companies consider in determining your credit limit include your credit score, existing debts and your income level. No credit card company will be willing to set a credit limit that is above what you will be able to pay back. Otherwise, the company will be facing the risk of default. So, if your credit limit is set at $3,000, it means that the maximum amount you can charge on the card is $3,000. Once you have hit $3,000 credit limit, you may not be able to use the card to pay except you first pay down the card balance. The exception here is when you have been pre-approved for over the limit spending. “Over the limit” is the arrangement that helps you to temporarily exceed your credit card limit in order to help you meet pressing needs. Any time you exceed your credit limit, you will be charged over the limit fee.
Read Also: Common Credit Card Charges you Should Know
Having said that, I need to draw your attention to the fact that you need to use your card responsibly. That is the only way you will be able to build your credit score. It is not good to charge the amount up to your credit limit to your credit card. The amount that is considered safe is about 30% of your credit limit. You should endeavour to keep your credit utilization ratio below 30%. Credit utilization ratio is your credit balance expressed as a percentage of your credit limit. If your credit limit is $3,000 and you have $1,200 balance on the card, your credit utilization ratio is 40%. This is considered too high. If you are the type that use credit card to make payments for almost all your purchases, you may likely overrun your safe credit utilization ratio. The solution to this is that you should not wait till the end of the month before you make payment on your card balance. You can decide to pay twice in a month. This will help you ensure that you keep your credit card balance below 30%. The higher your credit limit, the higher amount you will be able to charge on your card. If your credit limit is too low, you can ask your credit card issuer to increase your credit limit. Alternatively, you can apply for another credit card that will complement your existing one. It can be a good idea to try other type of credit cards apart from the regular card.
Read Also: A Guide on How to Increase Your Credit Limit
Existing Card Balance: If you have balance on the card or other credit cards (that is, if you keep more than one credit card), the amount you can charge on your credit card will reduce. For instance, a person with a credit limit of $3,000 who is already having $500 will not be able to charge the same amount with another person with the same credit limit who does not carry balance on his card. If you carry too much balance on your card, this will increase your debt to income ratio. Debt to income ratio is calculated by dividing all your monthly debt payments by your gross monthly income. You may not be able to get new credit or loan if your debt to income ratio is too high. For instance, if you plan to apply for mortgage loan, your application may be declined if your debt to income ratio is above 43% except your lender is a small creditor. If you get any credit or loan at all when your debt to income ratio is high, you should expect to pay high interest rate.