How Is My Credit Limit Determined?

What is a credit card limit?

A credit card limit is the total amount of money you can charge to your credit card. This includes new purchases, balance transfers, cash advances, and any other transactions that draw against your line of credit.

For example, if your limit is $2,500, you can charge up to and carry a balance of $2,500 without having to pay some of the balance off.

Experian reports that in 2021, the average American has access to $30,233 in credit (across all credit cards). That said, the average credit card balance was $5,221. Typically, credit limits can range from about $2,000 to $10,000 or more per card.

How is your credit limit determined?

There are a few ways a credit limit may be determined:

• Predetermined limit: Some cards come with predetermined credit limits. For example, a starter card may have a $1,000 limit while a premium card may have a $7,000 limit. This depends on the credit card issuer and doesn’t generally have anything to do with the cardholder themselves.

• Credit-based limit: This is when the limit is based on your credit score and history, including factors like payment history, credit utilization, credit mix, length of credit history, and recent inquiries. Income, employment, and other debts also play a role. Those with higher credit scores will be offered higher limits, while those with lower scores will be offered lower limits.

• Customized limit: In some cases, card issuers use a variety of factors to create customized credit limits for new applicants. This often includes the same factors as a credit-based limit determination, but can also include others like your debt-to-income ratio, bankruptcy score, and even the limits on your other credit cards.

Credit limit vs. available credit

Note that credit limit and available credit are not the same:

• The credit limit is the total amount you can borrow.

• Available credit is the amount that is remaining for you to use (including if you carry a balance).

For example, say you have a credit card with a credit limit of $2,500. You have charged $2,000, so you have $500 in available credit. If you make a $1,000 payment, your balance would fall to $1,000 you would then have $1,500 in available credit.

How to increase your credit limit?

There may be some cases where you want to increase your credit limit. Not only does it give you access to more funds to spend, but you can also increase your available credit, therefore, lowering your credit utilization rate. Higher credit limits can also increase the credit limits on future cards you apply for.

The two ways to increase your credit limit include:

1. Waiting for your card issuer to do it automatically. Sometimes, if you’ve had the card for a while, make payments on time, and keep a low credit utilization ratio, the card issuer may automatically increase your credit limit. This often happens annually. Keep in mind that if you’ve been irresponsibly using your cards, the issuer could also lower it.

2. Requesting a higher credit limit. If you don’t want to wait for the issuer to automatically offer you a higher credit limit, you can manually request one (typically through your online account or the mobile app, or you can call).

If you do this, make sure you provide additional information and changes that may affect their decision, such as having a higher income or recently improved credit score. Using your card responsibly over longer periods can also show you’re a lower-risk cardholder and can support your argument for an increase.

How credit limits affect your credit score?

Your credit limit primarily impacts your credit utilization ratio, which is the amount of debt you have compared to the total credit you have access to. For example, if you have a credit limit of $1,000 and you have used $500, your utilization ratio is 50%.

The lower your utilization ratio, the better. Having a higher utilization ratio can indicate you’re a higher-risk borrower and can lower your score. Experts recommend keeping your score below 30%.

What happens if you go over your credit limit?

Some cards allow you to exceed your credit limit without charging you a fee. Or, you can disable the ability to spend over your limit so that this never happens.

Other cards may simply decline your card if you try to use it and the purchase will put you over your limit. Or, they will approve the spend but you’ll be charged a fee if you’re part of an over-the-limit coverage program. These programs are optional, but if you’ve opted in, you could be charged for each billing cycle you go above your credit limit.

Note that if your balance stays above the limit and you opt-out, you may be charged additional fees.

You can always contact your credit card company to check the status of your limit and available credit. It’s important to keep track of your balance to avoid going over your limit.

How income affects credit limits?

Typically, credit card issuers will want to check your income to ensure you make enough to pay off what you spend (especially compared to your other debts and obligations). If you don’t have a high income, you may not be approved for a high credit limit.

Essentially, your credit limit is based on the minimum monthly payment you can comfortably afford given your income. For example, if you have a disposable income of $500 per month, and your minimum payment is 5% of your balance, your estimated credit limit would be $10,000.

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