Setting and Keeping Track of Your Credit Limit

Many people have trouble keeping track of their purchases on credit cards. Sometimes when the bills arrive, they're surprised at what they owe. For some people, that may mean they won't be able to pay off the balance in a reasonable time period, that is, under six months. Others may only be able to afford to pay the minimum payment required on a high balance. But that can lead to future problems. If the amount outstanding is large, the minimum payment may mainly pay the interest and not reduce the balance very much. Then, if the cardholder continues to add on debt each month, even making the minimum payment may become difficult.

To help people keep track of their credit card balances, Consumer Alert recommends that you use a Credit Limit Record. It's similar to a check register, in which you record the amount of each check and deduct each from the balance in your checking account.

With the Credit Limit Record, you establish what you can afford to buy on credit—your credit limit. First you should work out a simple budget that includes:

• Your take-home pay and other income
• Your regular and necessary living expenses, such as rent or mortgage, utilities, food, transportation, car payments, credit card payments, and other bills
• An amount committed to savings and investments.

Once you subtract your expenses from your income, the amount remaining, however, isn't necessarily the amount that you should use as your credit limit. Instead, you might want to have an emergency fund, pay down your credit card balances, or commit more to savings.

Once you complete your simple budget exercise, you should have a fairly clear idea of what you can afford to charge each month, and you can then set your credit limit. Many credit card users are "non-revolvers," that is, they pay off their balances in full each month and don't pay any interest. Thus, their monthly credit limit will be what they think they can afford to charge and pay in full when the payment is due.

Other credit card users, who maintain outstanding balances on which they are paying interest, would set their monthly credit limit according to what they can think they can afford to purchase on credit that will add to the outstanding balance. Their decisions should take account of what their monthly payments would be and how long it would take to pay off their balance in full.

Some experts recommend that people who want to take control of their credit card use shouldn't maintain balances that would require more than six months to pay off.

Setting Up and Using a Credit Limit Record

It’s easy to set up a Credit Limit Record. Follow these simple steps:

1. Figure out how much you can afford to charge on your credit card during the month.
2. Record that amount — your Credit Limit — on a card or on paper and keep it with your checkbook.
3. When you purchase an item or a service with your card, write down the amount you charged and subtract that amount from your credit limit.
4. Every time you use the card, deduct the amount of the purchase from your balance.
5. When you hit zero, it's time to stop using your card for that month.

Besides helping you to keep track of your use of credit cards, the register will also give you information that’s useful in refining your budget — what you are actually purchasing on credit. Try it for a month a see if the Credit Limit Record works for you in putting you in control of your credit cards.

This article was submitted by Consumer Alert, a non-profit organization that is dedicated to informing the public about the consumer benefits of competitive enterprise and providing information to help consumers make everyday decisions. Submission of this article does not imply an endorsement or recommendation of the Financial Resource Center site.