Guidelines for a credit card limit?

September 9, 2012 7:04 PM

Is there a rule of thumb or guidelines for selecting a credit card limit?

I just did a wallet clean-up and canceled some unused and high interest credit cards, and opened instead a new (and low-interest) card. The question came up of what limit to set (from maybe $500 up to enough to buy an nice European sedan, say), and I realized that I didn't have a good guideline for my situation.

I've googled and looked at previous questions (eg, also). However, most of what I've found has been focused on the question of maximizing one's credit score (such as the advice to keep utilization under 30%), and I already have a mortgage, I don't need a car loan, and it wouldn't impact my life at all if my credit score dropped. This is a card for emergencies (and vacation car rentals), not daily living (I use my debit card for day-to-day living).

I guess what I'm looking for here are guidelines or rules of thumb for how much available credit makes sense -- some multiple of monthly income? Enough "to buy two last-minute first-class tickets to wherever your family members and close friends live"? As much as the bank will give you? Don't have one at all and just keep a cash reserve?

posted by Forktine to Work & Money (7 answers total)

If you're not going to exercise the credit and spend money unwisely, there's no downside to having the credit limit be as high as possible. In general you want to have enough available credit to be able to handle an unexpected emergency -- but not if you're just going to spend it in non-emergency situations when you can't afford to.

I really think the most important factor here by far is how responsible you are likely to be. If you're good in that area, go high. If not, go low. A middle ground based on some arbitrary metric like two last-minute plane tickets to Seattle doesn't make sense.
posted by J. Wilson at 7:15 PM on September 9, 2012 [1 favorite]

For me, it' "half of what they initially offer/approve me for", unless the initial approval is less than $1000.

I, however, have a spending problem. I have been grateful for setting this limit on myself many times. YMMV.
posted by windykites at 8:02 PM on September 9, 2012

I say 4 months worth of expenses is ideal - this puts you at about 50% credit utilization when you pay off the card on the due date. Practically speaking, this means as much credit as the bank will extend you.
posted by crazycanuck at 8:07 PM on September 9, 2012

My rule is that the limit is no greater than my monthly income. If you go over that limit, you're guaranteed to be paying interest as it would be difficult to pay off a monthly balance that is greater than your monthly income, unless you had pre-existing savings.
posted by Sonic_Molson at 8:25 PM on September 9, 2012 [1 favorite]

Generally, when you apply for a credit card in Canada, you don't ask for a specific limit. In my experience, they'll usually give you 10% of your annual salary, rounded up to the nearest $500 or $1000. This may vary if your credit is not great or your income is low, I dunno. They'll then increase it from there either automatically or on request.

If you're accustomed to using credit now, I'd suggest thinking back to your most expensive ever month -- big trip? work expenses charged to personal card? both? Take that amount, and add 25% for buffer and inflation. Add more buffer if you've only got the one card. Add less if you're maintaining any of your other cards.
posted by jacquilynne at 8:56 PM on September 9, 2012

In my opinion, the real question is: How well do you manage your finances? I have a card with a $10,000 limit and a second with a $25,000 limit. I use them all the time, but the limits are irrelevantsince I pay off the cards each month. I like having the high limits as a just in case the worst thing ever happens. Actually, a few years ago, the worst did happen. A pet needed emergency surgery and I had to pay for it on a credit card. Man, that sucked! I busted my butt to quickly pay it off.

Too many people use credit cards to buy stuff they can't afford. The smarter way is to save money first and then use the card to get rewards points on the card without having to pay the credit card company stoooooooopid amounts of interest. Even as little as 5% interest adds up fast, especially as it rolls from month to month. 10% interest is crazy talk. 15%? Holy cow, get out now. Save up. Pay with credit. Immediately pay off the credit card. WIN!

Any month you carry over a balance, you're losing money. Possibly a lot of money. Don't do it.

So, my take is: if you're financially responsible, get the highest limit you can, but pay the card off each month, never carrying over a balance.
posted by 2oh1 at 10:25 PM on September 9, 2012 [3 favorites]

Seconding 2oh1 here. For a fiscally responsible person, more credit is great, because it reduces your overall debt utilization ratio, in turn improving your credit score. It's a bit dangerous to say your credit score does not affect your life. It can affect your job (if you have a job that uses creditworthiness in employment decisions), your existing mortgage (if you ever want to refinance the mortgage), and any future loans you might end up with.

In short, for someone who is rational about their use of credit, there is almost zero downside to getting as high of a credit limit as possible. For what it's worth, I have two cars around $20k-$25k; the only reason I don't go higher is I don't want to trigger a financial review.
posted by saeculorum at 10:45 PM on September 9, 2012 [2 favorites]