Should You Let Your Bank Limit Your Spending?
A Debit Card Spending Limit Could Help You Stay On Budget
Staying in control of what you spend is critical to your budgeting success. If you're unclear on where your money is going, it can be much harder to save for the short or long term, pay down debt or work towards other financial goals.
Drawing a mental line in the sand can help curb spending but there's something else you can do to keep your budget on track. You could ask your bank to impose a debit card spending limit (or a credit card spending limit if you use credit for purchases). Having a debit card spending limit in place can keep you from spending more than you intended, but it's important to consider the pros and cons first.
How Does a Debit Card Spending Limit Work?
A debit card spending limit isn't complicated. The bank simply puts a cap on the amount you can spend with your debit card each day. If you attempt to make a purchase after you've exceeded your daily spending limit, the transaction would be declined.
Debit card spending limits aren't a new concept; many major banks already have them in place. For example, Bank of America has a $5,000 daily debit card spending limit while Citibank sets the limit at $5,000 to $10,000, depending on the type of account you have and your banking history.
Banks can also set daily spending limits for credit cards. Again, once you exceed the daily purchase limit any additional transactions would be declined.
Benefits of a Debit Card Spending Limit
The primary advantage of a debit card spending limit (or a limit on your credit card) is that it can keep you from overspending. That's good for two reasons.
First, when you're not able to overspend you're in less danger of blowing your budget. You may be in a store and want to buy something on impulse, for example. A spending limit forces you to hit the brakes and reconsider the purchase. If it's something you truly need, you could always wait a day to purchase it. But having to wait could make you think twice about buying it.
Second, a daily debit card spending limit can keep your checking account from ending up in the red. Without a spending limit, you may be able to make purchases but if you spend more than you have in checking, you could land in overdraft. At that point, you could be on the hook for overdraft or non-sufficient funds fees, which can add up very quickly.
Is There a Downside to Capping Your Debit Card Spending Limit?
Potentially, if you find yourself in an emergency situation and need to pay for something but your bank won't authorize the purchase and you don't have a backup method for payment. And even if you don't have an emergency, it could put you in a bind if you're making a purchase that you've budgeted for but it exceeds your spending limit.
Having a lower spending limit on your credit card could also hurt your credit score. Part of your score is based on credit utilization, which is the ratio of credit used to your total credit limit. If your credit card company lowers your overall limit and your balance stays the same, that directly impacts your utilization ratio and could knock points off your credit score.
What We Like
Less danger of blowing your budget
Prevents you from overdrawing from your checking account
What We Don't Like
Lack of funds for emergency payments.
Your credit score might suffer as your credit utilization ratio is impacted.
Can You Ask the Bank to Change Your Debit Card Spending Limit?
Yes, you can and usually it's as simple as making a phone call or visiting a branch. Your bank shouldn't charge a fee to lower your card's spending limit but it's wise to ask if there's a fee for doing so beforehand.
Also, make sure the bank understands that you want the lower limit to be a permanent change. If you don't, the bank may assume it's only temporary and revert you back to your old debit card spending limit later. Remember also that it may take between 24 and 48 hours for your new spending limit to take effect.
Other Ways to Manage Spending
If your bank won't allow you to lower your debit card spending limit or you'd rather keep your limit the same, there are some other things you can do to keep tabs on spending.
- Record purchases in a daily spending log. This lets you see at a glance where your money's going.
- Link your checking account to a budgeting app. Choose an app that tracks and records your purchases automatically. Bonus points for using an app that groups purchases by category and creates charts or visual breakdowns of spending.
- Set up new transaction alerts for your debit card, credit card and checking account. Getting an email or text can be a gentle reminder to check your balance and your budget so you don't overspend.
- Set up balance alerts for your credit card. This can help you be more aware of how much of your credit limit you're using so you can put the brakes on spending temporarily.
- Automate bill payments and essential recurring expenses. Your bills get paid automatically so you don't have to worry about late fees and it simplifies the budgeting process overall.
- Consider switching to a prepaid debit card if you're really struggling. With a prepaid debit card, you can only spend the amount of money that's loaded onto the card.
- Challenge yourself to spend with cash only. Spending cash can trigger more of an emotional and mental reaction, whereas debit card and credit card spending are more "out of sight, out of mind".