Understanding credit limits (also known as spending limits) is crucial to your financial future. The first and most important thing to know is that every credit card you carry has a spending limit that is fixed month to month. If your card has an $800 spending limit you can only spend up to $800 at any given time. If you make a $20 purchase, your limit is now $780 and will remain at that level until you pay the $20 off. If you carry that $20 balance for 2, 3, or 6 months, your spending limit is still only $780.
That means your spending limit does not refresh each month. If you have an $800 spending limit, you do not have $800 more dollars to spend each month. If you owe $200, your limit is now $600 from month to month, until you pay that $200 back.
While we’re learning, let’s clarify a few of these terms for future reference:
Spending Limit — This is the maximum amount you can spend with your credit card at any given time. It does not, however, include the amount you owe. Once we subtract the amount you owe, we find the amount of credit you have currently available.
Available Credit — This is your spending limit minus the amount you owe. If your spending limit is $800 and you owe $20, your available credit is $780. Do not make purchases that exceed your available credit at any time.
Credit Card Balance — This is the amount you owe. Pay it in full (or as close as possible) within 25 days of your due date.
Billing Cycle — This is the one-month-long period between your payment due dates. If you pay on the 15th of the month, then May 15th-June 15th is one billing cycle.