Credit cards give consumers the flexibility to make purchases with money they don't have. Some credit card companies even offer cards with promotional periods of zero percent interest, which can allow you to put off paying for purchases for several months at no extra cost. Despite the convenience they offer, credit cards are subject to several important limitations that can reduce flexibility and increase costs.
Credit Limits
Credit cards have maximum balance limits that govern how much you spend. The balance limit on your credit card can make it impossible to fund larger purchases. Credit limits can change based on your credit history. If you have been a good customer for many years, your credit card company may decide to raise your limit. Credit card issuers may also decrease credit limits.
Cash Advance Limits
While credit cards often allow consumers to pay for goods and services without cash, hard currency is sometimes required. Credit card holders often have the option of withdrawing cash with their cards, which is known as a cash advance. Credit cards may impose different limits on cash advances and credit. For instance, if your card has a $5,000 credit limit, you still might only be able to take out $500 in cash advances. According to Bankrate, cash advances are also subject to additional costs such as upfront fees and high interest rates.
Exceeding Limits
Credit card companies make money by charging interest on funds borrowed and by charging fees on credit card use. If you exceed the limits of your credit card, you will likely incur finance charges. It can be easy to exceed limits if you don't keep tabs of your current credit balance; always keep track of your current balance to avoid going over your limit. Exceeding the limit by just a few dollars could result in costly charges.
Considerations
Limitations and additional costs are key components of the basic function of credit cards. Specific terms and limitations will vary from one credit card to another. It is important to carefully read credit card contracts so that you understand all the limitations and potential costs ahead of time.
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