Editorial Policy

Make Sure Your Credit Limit is a Good Fit

Erica Sandberg

March 15, 2013

QDear Erica,

How much should one person carry in total credit card limits? — Darin

AHi Darin,

If you're asking how much credit card debt is best to carry, the answer is simple: zero. Why live behind when you can live ahead?

Financing fees that are applied to revolving balances make hanging onto debt unnecessarily expensive. Also, a portion of your paycheck will have to be used to satisfy at least some of what you've already spent. That robs you of the chance to make the most of every incoming dollar. Instead of saving for the future and covering today's expenses, you're paying off the past.Ask Erica

However, if your question is what credit limit would be best to have on a credit account, that answer is a bit more complicated. You'll have to take into account how much you need to live the life you want and how much you can afford to pay back quickly — and then add a little extra for good measure.

For example, let's say that like me, you would like buy that recently introduced 2013 Ferrari F12 Berlinetta. For some reason, you'd like to charge it to your credit card rather than pay with cash or get a loan. With a price tag of around $300,000, you'd need at least that sum as a credit line. Yet if you're also interested in preserving your credit score, you'll have to have even more available to you.

Hitting your credit limit ceiling and staying there for more than a month will cause your credit score to decline. You see, outstanding debt comprises 30 percent of the score, making it the second most important factor (payment history, at 35 percent, is first) in calculating your credit score. The ideal balance for scoring purposes is to owe no more than 30 percent of the amount you're able to borrow. Even less is best.

Additionally, you'd have to be sure that you could and would pay everything back within a reasonable time. While it's possible to extend credit card debt over many years, plastic really isn't designed for long-term financing. Cards are much too costly for that. Interest rates tend to be higher than for closed-end loans (such as car loans), and it compounds. That means that finance charges are applied not just to the amount you spent, but on fees that have already been added to the balance.

When determining how much of a credit limit would be right for you, think about what you may want to use a credit card for on a monthly basis, as well as some other things you want to buy throughout the year. Maybe charging a car is ridiculous (it is), but charging a new laptop or furniture can be sensible.

Essentially, you don't want to have so much charging power that you can't restrain yourself from overdoing it, or so little that you can't do what you want to do without dinging your credit score.

Once you have the necessary credit power, use it for good rather than evil. Swipe the card only when you are sure you'll pay the bill in full in a reasonable time. Within 30 days is best, because you won't have to pay any finance fees. However, dividing a big bill into a few installments can be fine as long as you accept that you'll get hit with some interest fees, and as long as you keep your balance significantly under the charging limit.

Got a question for Erica? Send her an email.