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Financial Literacy

Financial Literacy

Home Finance Credit and Debit Credit Limits

Credit Limits

You want to live your life with no limits? Well, if you're carrying plastic in your free-wheeling lifestyle, it ain't gonna happen.

Credit limits refer to the maximum amount of money you can charge on your plastic before you have start paying things off. This limit is listed right on your agreement; it can be $500, $10,000, or a lot more. There are even some credit cards that don't have any limit (make it rain!) and allow you to charge anything—up to and including a private island—with no worries. No surprise: you have to be very rich to have one of them.

Why should you care about your credit card limit? Going over your limit, even a little bit, can hurt your credit score and usually results in lots of extra charges. Overcharge a bunch of times, and the credit card company might cancel your card or start charging you a higher interest rate, making it even harder to pay off your debt.

The Sky's Not the Limit

That credit card limit may not be as obvious as you think. Let's say you use your credit card to pay $200 for a pretty nice hotel room on prom night with all your friends. Your credit card limit is $500, so you go ahead and try to charge a $300 limo ride as well. Your card is denied.

What happened?

Well, companies have the right to place a hold on part of your credit. In this case, the hotel probably charged your credit card $200, but also placed a hold on more than that, so that if you and your friends got rowdy and trashed the room like rock stars, the hotel could reclaim that money, too.

Why Limit Yourself?

Banks and credit card companies limit their risk by limiting how much you can charge. With a limit, you can't get into too much trouble and if you turn out to be a deadbeat who doesn't pay your bill, they're not out millions of dollars because you decided to buy a private Beyoncé concert.

It protects you, too. If your credit card is stolen, the thief can only spend up to the limit on your credit card. (BTW, thanks to all sorts of laws, you're only are liable for $50 of unauthorized charges if your card gets stolen or lost.)

It might seem unfair that Bieber can charge a pet monkey while you can't even charge a new transmission, but those limits are there for a reason. The good news? As you stay with your credit card company and pay on time, your limit will continue to increase.

You'll get your monkey eventually.

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