Credit cards come with a credit limit, the maximum amount you’re allowed to spend with the card (until you pay it off). These limits can be as small as $500, but they generally don’t get much higher than $30,000 for those with the best credit reports.
Charge cards also have a limit to how much you can spend, though this is not always published and is known as the “shadow limit.” If you keep spending without paying the card off, eventually you’ll hit that limit.
You’ll be able to increase your credit limits as you improve your credit, because card issuers will trust you with more and more spending capacity.
This is important when it comes to your debt-to-limit ratio, which is a major part of your credit score.
Learn more about credit limits for credit cards and charge cards in our video with credit expert John Ulzheimer.
Hi, my name is John Ulzheimer and I’m a credit expert who contributes to CreditCardInsider.com. If you have any questions for us please submit them in the comments section below.
Today’s question has a lot of meat on the bones so I’m going to have to tilt to my computer and read it to you. The question is this: Do credit cards have a maximum credit limit? And then a follow-up to that is: Do charge cards have a maximum credit limit?
So let’s talk about those because we’re talking about two things that a lot of people, they use those terms interchangeably as if they’re the same thing: credit card, charge card. So a credit card is what ninety percent of the population has in their wallet right now where they’re able to swipe it or if you have a chip card they’re actually able to slide it through a chip reader and they’re able to buy products and services and at the end of the month they get a bill and then they have a choice: they can either pay the balance in full, or they can roll part of that balance from one month to the next. That’s called revolving. That’s the formal term for taking a balance from one month to the next. That’s a credit card.
A charge card is, for example, the American Express Green product, where you use the card exactly like a credit card to buy products and services, but then at the end of the month when you get your statement payment in full is due. You do not have the option to carry any part of the balance from one month to the next. That is a charge card.
So let’s talk about the limits on each of those two cards. All credit cards have a credit limit. All charge cards have a credit limit albeit an unpublished number, and some charge card issuers may argue that that’s not actually true, but nobody has a charge card or any form of plastic that has absolute, unlimited buying power where you could go out and buy houses and airplanes and things that are millions and millions of dollars. That just simply is not a possibility.
Credit limits are published for credit cards, and so if you have a credit card which you probably do, you can either look on your statement, you can call the issuer or you can log into the account online and see very quickly what the credit limit is. Most credit limits on credit cards are going to range from anything at $30,000 and below, and it’s going to vary. People who have either poor credit, or very young credit, they may have credit cards with 1,000, 2,000, $5,000 limits. People who have had credit for a longer period of time and who have a lot of experience managing credit cards, those folks are generally rewarded with much higher credit limits: 20,000, 25,000, I have one that’s 35,000. I don’t ever use the card, but I still have this behemoth credit limit if I ever chose to do so.
Charge cards; different story. These do not have a published, pre-set spending limit or credit limit, so there’s nothing that you’re going to get on your statement, or when you call and ask them, or when you log into the account online that says “Hey John, your limit on this particular card is 20 or 30,000.” Charge cards generally have what’s referred to as a “shadow limit,” which means that the issuer knows how much they’re going to allow you to spend on that card, but they’re not actually going to publish that. So you can try to use it 10, 15, 20, 30, 40 grand if you’re, for example, a small-business owner and you run all your expenses through it, but you’re going to eventually get to a point where they’re going to tell you “no more.” And they may actually tell you this proactively, or they may just decline to allow the transactions to complete at the point of sale or at the register and then you’ll know that you’ve essentially maxed out the card.
Now, one of the follow-ups to the question was “how does this appear on credit reports and how does this affect my score?” Very important question. Credit limits are reported to the credit reporting agencies by the issuing bank and it plays a part in a very important metric called the “debt-to-limit ratio” or the “revolving utilization ratio” and essentially what that is it’s the relationship between the balances on your credit cards and the credit limit on the credit report. And you probably are assuming that it’s better to have a low ratio, which is going to be completely accurate, so you want low balances relative to the credit limits, which means you want really high credit limits and really low balances because that’s going to help to buoy your score.
If you have a charge card and the charge card reports to the credit rating agencies no credit limit, because there isn’t one, if the credit limit is missing and there is no historical information about the highest balance you’ve ever had the card, then that particular card is not going to be considered in any of the newer scoring systems when calculating that debt ratio-to-limit ratio. And that can either help you, or it could hurt you. It can help you in the scenario where your charge card is maxed out, because it’s not going to be counted against you, but it can also hurt you if your charge card has a very very low balance relative to whatever the historical highest balance or the “shadow limit” happens to be, so it’s really a crap shoot.
What is factual, and what you can count on every single time, is that you’re going to want to keep the balances on those cards as low as you possibly can and pay them off as quickly as you possibly can. What some people do, actually, as a strategy, is they’ll actually log into the account before the statement even shows up, and they’ll pay the account off before the statement is even generated. That’s fantastic because it keeps the balance all the credit report. So it’s a great way to help buoy your score, kind of an interesting little strategy that not too many people know about, so we’ll just keep that between the two of us.
If you have any questions pertaining to credit or financial topics, please submit them to Credit Card Insider, or in the comments section below. Thanks for watching, and have a nice day.
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