The credit card limit is the amount that the institution issuing the plastic is willing to lend to the customer. It is calculated based on the customer’s profile and income, but the customer can ask to change it at any time.
But how does the limit work? And how to calculate the ideal limit to avoid uncontrolled credit card?
How the credit card limit works?
Each purchase you make on your credit card has its value discounted from the limit. This is only renewed when you pay what you owe. So, if you have a limit of one thousand dollars and spend 600 dollars in a month, there is only 400 dollars left to spend. When you pay those 600 dollars on the next invoice, your limit of one thousand dollars is restored.
In the case of installment purchases, the limit discount can be done in two different ways. One is by discounting the total purchase price. In this case, the limit will be renewed as the installments are paid. Suppose you have a limit of one thousand dollars and make a purchase in the amount of 700 dollars, divided into seven times of 100 dollars. Right after the purchase, your limit drops to 300 dollars. That is, you will only have another 300 dollars to spend on the card. After paying the first installment of 100 dollars, your limit will be reset to the same amount, rising to 400 dollars. The process will continue until the thousand dollars are recomposed.
The other way is by discounting only the portion of the month. Based on the previous example, and assuming you do not make any other purchases, only 100 dollars would be deducted monthly from your limit of one thousand dollars. That is, each month, you would have 900 dollars to spend, until you finished paying the seven installments.
The choice of the discount modality for installment purchases is up to the card issuer.
What is the ideal limit?
The operation of the limit, especially when there are installment purchases, can be confusing. In addition, the card sometimes has a pre-approved limit much higher than the user’s income. All of this facilitates uncontrolled spending, which can lead to debt. And the credit card is the most expensive credit line in the country, on average.
There are a number of steps you can take to avoid getting out of control. One of the simplest is to ask your operator to reduce your limit. According to experts, the ideal limit is 30% of your monthly income, as this is, in theory, the maximum that anyone should get into debt.
Thus, if your income is 3 thousand dollars per month, your limit should be, at most, 900 dollars. If you need to leave space for larger installments, the limit should not exceed 50% of your monthly income. That is, 1.5 thousand dollars for an income of 3 thousand dollars.