I got my first credit card in college, when I was about 18. At the time, I banked at Wells Fargo, and so got the most basic, no-frills credit card they offered. When I first got my card, I would check the balance online obsessively, at least once a week if not more (keep in mind the only thing I charged initially was gas, and I filled up my teeny, 400-miles-to-the-tank car about twice a month). I was terrified of letting anything sit on the card too long, because then I’d have to pay – say it ain’t so! – interest. That was probably my biggest fear at the time, the thought of having to pay more for something than the retail price just because I forgot to make my credit card payment.
Looking back, if you’re going to have an extreme mindset about credit cards, this is probably the best one to have. Because I was afraid to pay any interest, it didn’t occur to me that I could charge something to the card as an alternative to paying cash or using my debit card; I used a credit card because I knew I had to start building credit. I never used my credit card unless I had the money sitting in my checking account to pay for whatever it was I was buying, and keeping track of the balance on the card as well as paying the bill at least once a month quickly became a habit.
Eventually, Wells Fargo bumped the credit limit on that card up – something I didn’t realize credit card companies did, and as any naive teenager does in a panic, I called my mom for answers. After being nice enough not to laugh at me, she explained that some credit card companies and financial institutions that issue credit cards will bump up the limit over time, automatically and without the cardholder requesting it, on accounts that have a fairly positive history. I was immediately suspicious and interpreted this as the bank trying to get me to spend more money. HA! I thought, Fooled them. Little do they know I have no money..
When you’re using a credit card as tool to build positive credit and earn yourself an excellent credit score, it can be a very positive thing when financial institutions increase your credit limit. If you continue to use the card as you had been before the limit was raised, you will have improved your debt-to-limit ratio, a factor that makes up a whopping 30% of your credit score. If your usage remains the same but your limit has been increased, this means you’re using less of your available credit – a very good thing for that ratio.
That’s where I found myself with the Wells Fargo card when they raised the limit. The initial limit was around $1000; the new limit was a little over $2,000. My income hadn’t changed, so my spending remained the same, yet because my credit limit was higher I was suddenly using less of the credit that had been made available to me. Between that time and today, I picked up a second credit card for the specific purpose of helping to improve and diversify my credit report. I chose a Target Redcard, which is a credit card that can only be used at Target stores. This was a good move for me because A. I still didn’t spend enough to justify a decent rewards card and B. we did the majority of our shopping for necessities at Target (and still do), so it made sense to take advantage of the 5% off on every purchase made with the card/free shipping with any online purchase. We saved a bit of money on toiletries and household items, it was easy to keep track of because the card was only used at the store, and it had no fees.
Fast forward a few more years, to today. I’ve maintained those two credit cards by using them regularly and I’ve also since taken out a mortgage. I’ve never had a late payment and my debt-to-limit ratio has always been low. Happily, since college, my income has steadily increased (along with our total household income), and last month I decided I was finally at the point where I could properly utilize some sort of rewards card. We selected a card with no fees, that provided various percentages back on all purchases, and with rewards that we would be sure to use. I applied for the card and was approved. The plan was that I would stop using the good ol’ Wells Fargo card when I received the new card – I’m not going to close the account, as that could negatively affect my credit score, but I also don’t want to attempt to juggle multiple cards (and besides, switching between the two credit cards would diminish the rewards I could earn on the new card, as I would be charging less to it).
I eagerly awaited my new card in the mail. I felt like having a rewards credit card was something only real adults had, so I was excited (of course I still don’t feel like a real adult – I doubt I ever will). Yesterday, my shiny new card finally came – and I nearly had a heart attack when I saw the limit on it.
Twenty thousand dollars.
I stared at the number (it was $20,100, to be exact), thinking that surely had to be a typo. I mean, only people who get really ballin’ have this sort of limit, right?! Our idea of indulging and spending too much is going out for breakfast at J Christopher’s – wasn’t a $20k limit for people who went around giving hundred dollar bills to strangers around Christmas? People who were country club members and took in polo games on Sunday afternoons? People who are distant relations of a small country’s royal family?!
I had to call the customer service line to verify there was no mistake. There wasn’t. I couldn’t believe it, and still can’t believe that regardless of how good my credit score is or how good my credit report looks, a financial institution would issue someone my age with my income a credit card with a $20,000 limit. That’s ridiculous, insane, and completely unnecessary.
Of course, I’ll still use this card as I would had it a more reasonable limit. And after I stopped freaking out yesterday, I started to realize such a high limit would come in handy – and not just when I wanted to take me and all my friends to Vegas or something. Starting next year, we plan to travel at least once a year overseas. With this card, I’ll easily be able to buy us round-trip plane tickets that cost about $2000 without maxing out a card (even for a few days, as of course I’d want to pay that balance back down immediately). Instead of paying for big-ticket items with a debit card, they can now be put on the new credit card so we can get the reward points before paying off the card. In a short-term emergency – say, if our car broke down in the middle of no where on vacation – it will be nice to have a card that we can charge unexpected expenses to, knowing that there’s still plenty of room on the card for those sorts of things along with our normal purchases.
The more I thought about it, the more I was glad to have received such a high limit. It doesn’t have to be impractical – and with us, it won’t be. Our financial habits, especially how we handle our credit cards, will remain the same. That twenty-thousand dollar limit isn’t tempting me to spend more money at all.. if anything, I’m even more terrified than I ever was before of the thought of paying interest on this monster and I feel less inclined to spend money. The only thing that will really change will be the fact that we’re now getting rewards for purchases we would have made anyway, which is nice.
But I’m still slightly amazed that it was so easy to get hold of a card with this kind of limit, and it really opened my eyes to how easy credit card companies make it for folks to get into trouble and fall into debt. I can see how tempting it would be to go on major spending sprees, or to start thinking about major purchases that you otherwise would never consider. It’s a little scary, and to me, it underlines just how important it is to have a good understanding of personal finance and how money works in general.
Have you ever been surprised by the limit on your credit card? Has a large limit ever surprised you by coming in handy when you least expected it – or have you ever been tripped up by spending too much on a card that allowed you to charge really large purchases?