How credit charging limits work


Opening Credits
Columnist Erica Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for

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Dear Opening Credits,
I have a secure credit card with a $300 credit limit. Does my credit limit restart every month?  -- Floyd


Dear Floyd,
The best part of my job is answering questions that millions of people have, but are too proud to ask out loud. No one wants to appear foolish. However, the smartest thing to do is open up and say, "Hey! This may be basic, but I don't get it -- please explain!" After all, as soon as you have the correct information, you have the power to avoid making expensive mistakes that can impact your life for years.

So here is a primer on how credit limits work.

Credit card issuers offer different types of accounts for different customers, but the majority of credit cards come with credit charging limits. That is the amount you can spend within a billing cycle. A billing cycle is the number of days -- usually about 30 -- that cardholders have to spend up to that fixed sum.

People with long, impressive credit histories are low risk customers, so they typically can qualify for cards with very large credit lines, which can be in the tens of thousands. Others have unestablished or damaged credit histories, so are therefore riskier to do business with, so their limits will be far less generous. A few hundred dollars is a typical credit line for those who need to start or repair their credit reputations.

The card you have is secured by cash you put down as collateral. If you don't repay what you charged within a specific time period, the issuer has the right to claim what is due from your deposit. Other than that, secured cards are generally the same as unsecured cards. When you spend with it, you're not dipping into the funds held in deposit, but the issuer is lending you the money. Always remember that. It's not your cash that you're spending; it's theirs. And they expect it back.

If you were to charge $200 this month on your $300 limit card, you would receive a statement listing what you spent and where, your total balance, the minimum expected payment and due date. Pay the entire amount you charged by that date and you will have the full $300 to spend again. Make a partial payment, though, and interest will be added to what you defer to the next month, causing you to have less to spend. You won't have complete rights to the credit limit until the balance is once again at zero.

For example, if you paid $50 on that $200 debt and the interest rate is 21 percent, approximately $5 would be assessed as finance fees, and would be added to the balance due. Therefore, instead of being able to charge $250 the next month (300-50=250), you'd only have $245 of the credit line left to charge with because of the fee, which is added back in (300-50+5=$245). As you can see, the charging limit remains the same, but your borrowing power is reduced by the carried over debt and associated fees. 

What should be obvious now is that paying a balance in full makes a lot of sense. You'll guarantee that you'll always have the maximum spending amount available to you, and won't pay extra in finance fees. Not only that, you'll be proving you can master that credit card. All the account activity is showing up on your consumer credit reports and factored into credit scores. You will increase your credit rating with regular, responsible use, which really just boils down to POTIF: paying on time, in full. Over and over again.

Once you've demonstrated that you can charge and repay this way, the issuer may agree to increase your credit limit or even switch the card to an unsecured account. And if they don't? Others almost certainly will.

See related: FICO's 5 factors: The components of a FICO credit score, Anatomy of a credit card

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Published: January 7, 2015

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Updated: 10-26-2016

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