Credit Card Debt Management

Every credit card has a credit limit attached to it. This limit will be given to you from day one, and you need to keep it in the back of your mind at all times. If you don’t know your credit limit there is a chance that you will go overboard and end up in trouble. No matter what type of limit you are dealing with you need to realize that it is in place for a reason.

Did you know that your credit card company will charge you if you go over your credit limit? This is news to many consumers, but quite true. If you go over you threshold, whatever it may be, you are going to end up paying for it in the end. In turn, not only do you have a maxed out credit card but you also have another fee to deal with. Doesn’t sound like too much fun, does it?

What if my credit limit is not high enough? This is something that many consumers complain about. They love using their credit card but don’t have enough available money to stay happy. In this case you can do a couple things. One, you can call your credit card company to request a limit increase. They may not approve this but there is nothing wrong with asking. Your other option is to get another card so you can have more available credit.

It is important to know your credit limit and abide by this number at all times. There are many mistakes you can make with your credit card, and going over your limit is one of them. From the day you receive your credit card in the mail you should know your limit and learn to keep your balance lower than this number at all times. 

The credit card is a thing of prestige in some circles. Take, for instance, the recent American Express commercial poking fun at the businessman’s comic book character-themed credit card in lieu of the prestigious AmEx Gold card. In fact, in the commercial it causes the poor, dim-witted businessman to lose out on an apparently lucrative business deal.

Yes, credit card colors and styles draw respect in some circles. Another point of pride, albeit one much less talked about, is the credit limit. Credit card companies can raise your credit limit at will, just as they do with your interest rate. Card issuers increases generally consider credit limit increases two or three times a year. When the bank sees you handling your repayment plan responsibly (i.e. no late payments or over-the-limit charges), they will likely offer you an increased credit limit. If you get an offer for an increase in your limit, you do have the option to decline it, unlike an interest rate increase (too bad we can’t decline those)! You may want to decline it if you are having trouble paying off the balance you already have, but we’ll get to that.

A credit limit increase is often viewed as a good thing by the cardholder. All too often, it’s also viewed as a signal to spend more, spend more. There are two problems with this. It gets the consumer mired deeper and deeper in debt. It’s a psychological issue, and a huge temptation for cardholders who haven’t learned how to get their spending under control. Just because you have room on the card doesn’t mean you can afford the payment. If you can’t afford it now with cash, you won’t be able to afford it a month from now. It may sound like your grandmother talking, but she knew what she was talking about.

Furthermore, credit card companies can decrease spending limits just as fast as they increase. This can have consumers over a barrel with interest charges and over-the-limit fees. It can ding their credit report in a major way and cause their interest rate to skyrocket. It ain’t pretty, and don’t think it won’t happen to you. Bottom line, is a credit limit a good thing? It’s all relative. But if you have a history of credit troubles, it’s best to decline the offer. It may be handy in an emergency, but the chances are good that you would have already nearly maxed out your available funds and they wouldn’t even be available anyway.

Farnoosh Torabi, one of the foremost financial minds of Generation Y, has posted an interesting article on TheStreet.com about why, exactly, credit limits might be shrinking. Like Torabi, my credit limit was also recently increased, much to my surprise. I have, however, been shopping home loan offers, so this will probably change shortly. Torabi and I, with our credit limit increases, appear to be in the minority if the media reports are true. Credit limits are being slashed, but why? When it happens to you, “It’s the economy, stupid,” isn’t really an adequate answer. So what are the real, nitty-gritty reasons behind the shrinking credit limits? Torabi shares her insight, and here are some of the highlights:

What are you buying? If you are putting minimal, everyday purchases like your Starbucks coffee on your credit card (i.e., things you should be able to cover with cash), that can be a giant red flag to your creditor. Torabi also points out that frequent alcohol purchases could indicate the risk of a health problem that could have financial repercussions.

Are your bills caught up? Thanks to the infamous universal default policy, your creditors are able to keep track of — and punish or reward you for — your bill-paying habits. Late on the cable bill, utilities bill, the car payment or the credit card bill? It could cost you in terms of a lower limit or at least a higher interest rate.

Where are you living? Areas of the country with tanking real estate markets, like Florida, Detroit, and Nevada, can cause problems for local residents in more ways than one. That’s right, these area residents can see their limits lowered simply because the terrible local housing market might lead creditors to believe these customers are at a higher risk of financial distress.

Where are you working Are you a realtor? General contractor? Good luck. Are you an airlines pilot? Your credit limit could see decreasing altitude in the near future. Even if you’re successful, these are currently seen as high-risk occupations and your creditors could lower your limit as a result.

Like Big Brother in George Orwell’s famous novel, these credit card companies are keeping an eye on way more than you could have ever imagined. And for good reason — they themselves are at risk of financial distress due to bad loans. So cross your T’s, dot your I’s, and remember to whip out your debit card — not your credit card — next time you’re in the Starbucks line.