What Is an Ideal Credit Limit?
Many cardholders often take on owning a credit card without really considering the responsibilities that go with it. Credit cards are very effective means of convenience and security for a cardholder. The downside is when a cardholder forgets the responsibility of owning a credit card.
We must always remember that a credit card is a pre-approved debt that is granted by the issuer to its cardholder. This allows the cardholder to make purchases with different merchants, supported by a cardholder’s promise to its issuer that they will pay at a future date. With this agreement, an issuer allows the cardholder to purchase at a certain limit. This limit is based on the issuer’s evaluation of the cardholder’s capacity to pay and credit standing.
Often, an issuer grants a credit limit to its cardholder which is a bit high. This is where responsibility in managing the credit limit is important. As much as possible, request your credit card issuer to put a credit limit that is around 80% of your monthly income. This will allow you to have the capacity to liquidate the entire debt if you need to. A credit limit beyond your income is not bad at all as long as you know how to manage your debt properly. An example would be setting rules with regard to your card usage and debt you allow to be charged to your credit limit.
There is a certain amount of debt you have to maintain with your credit card which is compared to your credit limit. This is called your debt-to-limit ratio. This debt-to-limit ration is very important to credit companies and are actually being used to evaluate the cardholder’s credit standing. An ideal debt-to limit ratio is 30%. This means that if you have a credit limit of $10,000.00, try maintaining your expenditures within the $3,000.00 range. This allows the cardholder to raise your credit scoring and gives the creditors an idea of you being able to manage your finances. This will grant you a low risk score for creditors.
Properly managing and maintaining a reasonable debt-to-limit ratio allows you to manage your finances better.