Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.
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Dear Opening Credits,
just got my first credit card and I forgot to ask this question. You know how
they set a limit for you? Well, mine is $800. Let's say I buy something that's $100.
When I pay that $100 off, will the credit limit go back to $800? -- Cristina
it lovely to hold your first ever credit card? Savor this moment. It means that
you now have the liberty to borrow money from a credit issuer. You can buy
stuff or services and enjoy them now, and then pay later.
To know how credit limits work, you've got to first understand billing
cycles. This is the amount of time between monthly bills being due. By federal law, due dates must be the same date every month. During your billing cycle, you are
allowed to charge any sum up to your credit limit.
say that you did use your credit card to pay for $100 worth of items during a
billing cycle. When the cycle ends, the issuer will send you a statement
outlining where you used the card, how much you spent on each item, the total
of what you spent (called the balance), and how much you are expected to pay as
a minimum payment to keep the account in good standing.
If you were to send
the issuer the entire balance of $100, you would not be charged any interest
because you would have satisfied the debt within the fee-free grace period
(which is your billing cycle). As soon as your payment is posted, your credit
line bounces back to the full amount you're allowed to borrow. In your case,
Easy and simple,
right? Well, sort of. Calculations get a little more complicated when you pay
less than the full debt. That because interest fees will be added to any amount
you roll over to the following month, thus affecting your charging limit. For
- Your credit limit
- You charge $100.
- You make a $30
- $70 revolves onto
next month's statement.
- A $4 finance
fee is added to the balance (assuming a 20 percent interest rate).
- The total amount you can charge is
$726 ($800 - $100 + $30 - $4 = $726).
It is important to
always know how much you have spent with the card because you want to be sure
that you can repay the entire debt by the time you get your statement. In the
scenario I just described, a few bucks being added on doesn't seem like such a
big deal. But if you ran the card up to the maximum and always just paid the
minimum, it would take you 36 months to repay. The extra finance fees would be
around $267 by the time you were at a zero balance.
consideration: from the date of issuance, all of your activity with this card
is appearing on your consumer credit reports. If you use the card often, but
pay on time and in full, you'll look like a credit goddess to all
who view your file. However, let payments lapse or allow debt to escalate
(constantly owing more than 30 percent of your limit is considered risky
behavior), and you will quickly fall from grace. Keeping pristine credit will
serve you well later on should you need to finance a large purchase, such as a
car or a new home. Those with excellent credit qualify for the best interest
The very best way
to use that fresh, shiny card is to only charge what you can afford to repay in
about 25 days. Do so and you'll not only have that $800 available
to you, but the issuer may soon raise the limit, giving you even greater
financial freedom. Can you handle the increase? Practice with this low line
first and I bet you can.
See related: How minimum payments are applied to small balances, Will minimum payments damage your credit score?