Your credit limit is the amount of money you have access to through your credit card and can range up to $100,000. When you use a credit card, the amount of money spent becomes the balance, and the amount of available credit is adjusted to reflect that.
A high credit limit gives some people the illusion that they have more money and makes it easier to spend more than they can afford to pay off the card, ultimately leading to credit card debt. Choosing your own credit limit when you apply for a credit card, or requesting a lower limit on a card you currently use can help reduce the risk of this scenario.
Case Study: Aaron’s High Credit Compromise
Aaron is a successful entrepreneur who earns $100,000 per year from his work. He applies for a new credit card and lets the provider assign him with a credit limit. After assessing his application, the credit card provider approves him for a $100,000 credit limit.
Aaron uses his card to take his family on a holiday, which costs him $20,000. He can’t afford to pay it all off at once, so he pays the minimum required. Aaron returns to work after a month and finds he has invoices worth $10,000 to pay. He hasn’t earned enough during his time away to make these payments, so he uses his credit card. This brings Aaron’s balance to $30,000 and he has no way to pay for it except to keep working.
Aaron thought that he could use his credit card for everything, without considering the money he actually had in his bank accounts. If he continued to use his credit card in this way, he would have credit card debt for the rest of his life.