How much of my credit card limit should I use?

You use up a portion of your credit limit every time you swipe your credit card. While it can be tempting to max out your credit card and worry about paying the balance later, it's not necessarily good financial practice.

The percentage of your credit limit you use each month can influence many parts of your overall financial portfolio and impact your future eligibility for financial products. Before you start charging everything to your credit card, it's essential to understand how much of you it should use.

We explain what credit limits are, how they influence your credit score, how much available credit limit you should have, what a good credit utilization ratio is, how to calculate your credit utilization ratio, how you can get a higher credit limit, and how to manage your credit utilization rate.

What is a credit limit?

A credit limit is the maximum amount of money you can spend on your credit card. If you have a $5,000 credit limit, you can spend up to that amount without penalty fees. You can opt-in for overdraft coverage protection, which allows a transaction to go through if the balance goes below zero. You'll likely have an overdraft or cash advance fee. However, the transaction won't go through if you don't have this protection.

Financial institutions and credit card issuers use your credit report and income to determine how much credit they want to give you. The purpose of credit limits is for financial institutions and credit card issuers to reduce the risk they have by issuing you a credit card. A good credit score and stable income show you have good financial habits and are less likely to miss payments or default on your credit card debt.

How much credit should you have?

It depends on your spending habits, whether you can be responsible with a higher credit limit, and whether you typically carry a credit card balance. While a credit limit represents how much you're allowed to spend on your credit card, it's not necessarily a good idea to spend the entire limit. Credit card issuers look at your payment and credit history to assess your risk as a borrower and give you a reasonable credit limit.

Here are some things to consider when determining how much credit you should have:

• your spending habits

• your credit score

• your credit history

• how much you can comfortably pay off each statement period

• your financial goals

• your existing debt

It's important to consider how much credit you can manage responsibly, as poor habits can have a negative impact on your credit score and potentially subject you to fees and interest charges.

Credit limit and credit utilization ratio

Your credit limit and credit utilization ratio are closely related and one can influence the other. Your credit utilization rate is the percentage of your total credit limits you use. It includes all your credit accounts and loans. For example, if the total amount of credit you have is $10,000 and you spend $5,000, your credit utilization rate is 50%. Since credit cards have revolving credit, your credit limit resets each month, and your utilization percentage changes depending on how much you spend.

What is a good credit utilization rate?

Your credit utilization rate is an important factor in determining your credit score. Credit bureaus give you a three-digit credit score based on your credit utilization rates and credit and payment information. A good utilization percentage can qualify you for a new credit card, mortgage, line of credit, or personal loan. It can also help you secure better loan terms, such as lower interest rates and monthly payments.

Experts recommend you keep your credit utilization to 30% each month. If your total credit limit is $10,000, you should ideally spend only $3,000 on credit. A high utilization rate can signal potential financial troubles, like too much debt and difficulty paying your bills. It also affects your credit score, and lenders may be less likely to qualify you for a limit increase or additional loans.

Can I get more available credit?

There are a few ways you can request a credit limit increase. You can apply, or the credit card issuer can preapprove you for an increase. You can request a limit increase online or by going to a physical location and letting them know how much credit you want. The credit card company may assess your credit score and payment history to determine whether you can manage credit responsibly and qualify for an increase.

Credit card issuers may also preapprove you for a credit increase if they see responsible financial behaviour. The average credit score in Canada is 680, and your score can change monthly. A consistent high credit score increases your chances of getting preapproved for a credit increase as lenders trust you with more credit.

Here are some ways to boost your credit score if you want to ask for a higher credit card limit:

• lower your credit utilization

• pay your credit card balance on time

• check your credit score regularly

• dispute inaccurate or missing information on your credit report

How to manage your credit utilization ratio

Credit management is an important skill to improve your overall financial well-being. A healthy credit utilization ratio is around 30%, so it's a good idea to do what you can to keep your spending at 30% of your total available credit. Here are a few tips to manage your credit utilization.

Ask for a low credit limit

If you're worried about using too much of your credit limit, you can ask for a low credit limit to curb your desire to spend more. Just as you can request an increase to your credit limit, you can also request a decrease to keep your spending in check. It can help you build good spending and money management habits and help you stick to a budget.

Increase your credit limit

If you only have a few credit accounts and feel confident you can responsibly manage more credit, you can ask for a credit limit increase. A higher credit limit lowers your credit utilization ratio, which can help keep your credit score in good standing. If you can't responsibly manage more credit, it can negatively affect your score instead.

Pay off balances in full

Paying your credit card statement in full prevents unnecessary interest charges and ensures you don't carry a balance into your available credit for the next month. You can also pay off all or a portion of your balance before the credit statement. It gives you more spending room and lowers your credit utilization ratio if you cut it too close to your limit.

Apply for more credit

Besides a credit card, you can gain more credit by applying for a line of credit, a new credit card, or a personal loan. The lender may conduct a hard credit check to determine your eligibility, which could impact your credit score. Be aware of how many new credit accounts you open, as frequent hard inquiries can be a red flag for lenders, and it can be challenging to manage too many credit accounts.

Build credit responsibly with KOHO

It can be challenging to manage a credit card and develop healthy credit management skills. But with KOHO, you have a variety of products and expert insights to guide you onto the right path. For example, the virtual credit card is a great tool whether you're building credit history as a newcomer to Canada or repairing a less-than-stellar credit score. With no credit checks, you don't have to worry about whether it'll affect your approval chances. You can spend instantly while earning cash back on every dollar and manage your money responsibly to develop good spending habits.

We make it easy for you to monitor your overall financial well-being with a free credit score, giving you important insights into your payment history and credit accounts. You can address any concerns immediately to lower the impact on your score.

If you want to save for various financial goals, you can earn interest and cashback along the way with a high-interest savings account. Whether you're planning a big vacation or want a new car, you can use the high-interest savings account to speed up your savings and help you get there quicker.

Learn more about how to build your credit with KOHO and create a strong financial portfolio to get you closer to where you want to be.