Many people, when they get a credit card, hope to have a really high credit limit so that they can use it to buy as much as possible. However, this may not always be the most sensible idea, it is worth thinking hard about what might work best for you. Understanding how the card works is a good place to start and then getting an understanding of how to use a card to your advantage and how to avoid problems with them so that you can decide on the right credit limit for you.
How a credit card works
A credit card is a way that you can borrow money or delay paying for things that you buy. You can buy things using the card and then after around a month you will get a bill. You will then be requested to repay the minimum balance owed, which is usually just the interest plus a little more or you can pay any other higher amount up to the whole outstanding balance. If you repay everything you pay no interest and if you pay less than this you will be charged interest on the outstanding balance. Interest on credit cards can be quite expensive compared to some other types of loans and so if you intend to use it and not repay for a while then think about whether this is the best option for you or whether you might be better off trying something else.
Best way to use a credit card
As you may have guessed, the best way to use a credit card is to repay it in full each time you get a bill. You can set up a direct debit to do this and then you will not have to worry about repaying it at all. A credit card can give security when shopping and so it can be advantageous to use it over a debit card or cash. This is because it has insurance on it which means that if your goods are faulty or do not arrive (when ordering online or mail order) you will get your money back if the retailer does not reimburse you. This can be really handy, particularly if you are buying online and means that you do not have to be so nervous when you are ordering form companies that you have not used before. The cards are also more secure than debit cards when using them online and so they can be handy for these purchases too.
Some people will therefore just use their cards of online purchases so that they can take advantage of the security and insurance. Some use them for everything. It is wise to think about how to use yours. The best way is probably to use it for everything so that you can delay paying for it, but set up a direct debit to pay off the outstanding balance in full every time that you get a bill.
Problems with credit cards
Problems come with credit cards when spending gets out of control. It can be too easy to use them for buying too many things so that when you have your bill there is not enough money to repay them. Some people can easily get carried away as they see the money available on the credit card as theirs to spend on whatever they like. There are others that do not have this attitude but spend on it without keeping a check on the balance and accidently spend more than they can pay back. This is where the credit limit becomes important. If you set a limit that you can afford to repay then you should never get into the situation where you will need to not repay the bill in full because you cannot afford it. It can be tempting to have a high credit limit so that you have the money available if you need it but beware if you do this and make sure that you do not overspend on the card.
It is also important to think that every penny that you do not pay back will attract interest and so will be costly. Therefore if you have a high credit limit and spend more than you can afford to pay back, you will have to pay interest on this. This can really add up if you leave the card unpaid for a long time and effectively will mean that the things that you bought with the card will be costing you more money. You may not have bought those goods if they had cost that much more, but now you are paying extra for them after purchasing them. Therefore think carefully about what you are using the card for, keep your spending on track and set a low credit limit to reduce the risk of your card going unpaid.