Understanding Your Credit Limit: What It Means and Why It Matters Peoples Savings Bank

person taping their credit card on a point of sale terminal at a boutique store.

Educational

Understanding Your Credit Limit: What It Means and Why It Matters

March 19, 2025

Credit cards can be a great financial tool, helping you cover expenses, build your credit score, and even earn rewards. But there’s one key number on your credit card statement that deserves your attention: your credit limit.

If you’ve ever wondered what your credit limit really means, how it’s determined, or why it even matters, you’re in the right place. Let’s break it all down in a way that actually makes sense.

What Is A Credit Limit?

Your credit limit is the maximum amount of money you’re allowed to borrow on your credit card. Think of it as your spending ceiling — your lender sets this limit based on factors like your income, credit score, and overall financial health.

For example, if your credit limit is $5,000, you can’t charge more than that amount at any given time. If you do, your transaction may be declined, or you could face over-limit fees.

How Is Your Credit Limit Determined?

Credit card lenders don’t just pick a random number for your credit limit. They look at a few key things to decide how much you can responsibly borrow:

Your Credit Score – The higher your score, the more trustworthy you appear to lenders. A strong credit history could mean a higher limit.
Your Income – Lenders want to know that you have enough income to repay what you borrow. The more you make, the more credit you may qualify for.
Your Debt-to-Income Ratio (DTI) – If you already have a lot of debt compared to your income, lenders might give you a lower limit to reduce their risk.
Your Payment History – If you’ve consistently made on-time payments on past credit accounts, lenders may be more willing to grant a higher credit limit.
Your Existing Credit Accounts – If you already have a lot of available credit on other cards, lenders may offer you a more conservative limit.

Why Your Credit Limit Matters

Your credit limit isn’t just a number, it plays a big role in your overall financial health. Here’s why it’s important:

Impacts Your Credit Utilization Ratio – One of the biggest factors in your credit score is how much credit you’re using compared to your total limit. This is called your credit utilization ratio, and keeping it below 30% is key to maintaining a good score.
Affects Your Ability to Borrow More Later – A higher credit limit, when used responsibly, can help build your credit history and make it easier to qualify for loans or mortgages down the road.
Gives You Financial Flexibility – Having a higher limit can be helpful in emergencies, giving you a financial cushion if unexpected expenses pop up.
Can Lead to Overspending – On the flip side, a high credit limit can be tempting. It’s important to treat your credit card like a tool, not a license to spend beyond your means.

How to Manage Your Credit Limit Wisely

Now that you know why your credit limit matters, here are a few smart ways to manage it:

Keep Your Utilization Low – Try not to use more than 30% of your limit at any given time. For example, if you have a $5,000 limit, aim to keep your balance below $1,500.
Make Payments on Time – Even if you can’t pay off your full balance every month, always make at least the minimum payment to keep your credit in good standing.
Monitor Your Spending – It’s easy to swipe without thinking, so keep an eye on your balance and avoid maxing out your card.
Request a Credit Limit Increase (When Ready) – If you’ve been responsible with your credit, you can request an increase to lower your credit utilization and improve your score.
Avoid Unnecessary New Credit Cards – Opening too many new credit accounts at once can temporarily lower your score and make lenders wary.

What to Do If You Go Over Your Credit Limit

Accidentally charged more than your limit? Here’s what to do:

Make a Payment ASAP – Reduce your balance quickly to avoid fees and potential damage to your credit score.
Check for Fees – Some lenders charge over-limit fees, so review your statement and call your issuer if needed.
Adjust Your Spending – If you’re constantly hitting your limit, consider asking for a credit increase or re-evaluating your budget.

PSB’s Credit Card Perks

At PSB, we offer a range of credit cards with competitive rates and rewards programs. Here are some of the perks you can enjoy with our credit cards:

Cashback rewards: Earn 1% cashback on all purchases, with no rotating categories or spending limits.
Travel rewards: Earn 2% cashback on travel purchases with our Visa Signature card, including air travel, hotels, and dining.
Credit score monitoring: Get free FICO® credit score monitoring and reporting to help you stay on top of your credit health.
Zero Fraud Liability and Fraud Monitoring

Learn More or Apply Online

Final Thoughts

Your credit limit isn’t just a cap on spending, it’s a key part of your financial health. By understanding how it works and using it wisely, you can build strong credit, avoid unnecessary debt, and stay in control of your finances.

If you’re looking for smart banking solutions to help manage your credit, Peoples Savings Bank is here to help. Reach out to us today to explore your options and take control of your financial future!