A credit card’s credit limit is one of the most important aspects for a cardholder to be aware of. Credit limit not only determines your purchasing power, but it also contributes to your overall financial health.
However, issuers don’t usually reveal how your credit limit is determined, and they tend to be vague about how to increase it. As a result, some cardholders may not know what goes into a credit limit, and what makes it so important. If you understand the rules around credit limits, you can improve your credit score and take more control of your financial future.
What’s a credit limit?
A credit limit is how much credit the credit card issuer provides to you, and the maximum amount you can borrow at any time. You can spend up to your credit limit before your transactions are declined or you begin to incur penalties.
When you use your credit card, you’re borrowing money against your credit limit to fund the transaction. Your account balance goes up, and your available credit goes down until you pay the bill.
For example, if you have a credit limit of $10,000 and you make a number of purchases totaling $2,000, your available credit becomes $8,000 with a statement balance of $2,000. After you pay the full $2,000 balance -- assuming you pay your balance before you accumulate interest -- your available credit once again becomes $10,000. A simple way to think about it is:
Credit Card Balance + Available Credit = Total Credit Line
Your credit limit also accounts for any balance transfers you may initiate on your account, so if you have a credit limit of $10,000 and transfer a balance of $5,000 from another credit card, your available credit would then be $5,000 (plus any interest or fees) until you pay off the outstanding balance.
There are a number of other financial products aside from credit cards that feature credit limits, or credit lines. These include business lines of credit and home equity lines of credit (HELOCs).
What determines your credit limit?
How lenders determine your credit limit varies, but there are a few things that carry through regardless of the institution you’re asking to borrow from. The lender’s underwriting process -- the process by which lenders decide how much to lend a borrower -- is proprietary, meaning issuers don’t disclose exactly how it works, because it’s central to the issuer’s business model. It would be like if a restaurant revealed the secret ingredient of its best dish.
That said, there are a number of factors that impact how large or small your line of credit will be, despite which lender you’re requesting the loan from. Credit score, payment history, credit history, income, debt-to-income ratio and the overall economy all likely contribute to a lender’s decision.
In the end, it comes down to your overall creditworthiness, or how financially attractive you are to a lender. The better your creditworthiness, the more favorable your terms will be, which typically means a higher credit limit and lower interest rate.
What happens if you charge more than your credit limit?
If you try to make a purchase over your credit limit, your card will likely be denied depending on if you have any over-limit protections in place.
Most credit issuers no longer have over-limit fees, however, and issuers can’t charge a fee for over-limit purchases without consent, following the CARD Act of 2009.
If you did opt in to over-limit protection, the purchase will go through, but you’ll incur a fee. Continued over-limit use could result in a lower credit score and increased interest rates, or the credit issuer could close your credit account entirely. Repercussions could also include a lower credit limit.
“Someone who is maxing out a credit card, or coming close, might have their credit limit reduced as a risk mitigation tactic, or the credit card company might give them an even higher credit limit in the hope that they’ll keep spending,” said Ted Rossman, a credit card industry analyst.
It’s important to keep an eye on how much you’re spending each month, and to stay up on all of your monthly payments to avoid overcharging and the headaches that come with it.
Why would I want a higher credit limit?
A higher credit limit can have a number of positive impacts on your financial health. It makes it easier to avoid overcharging, it can lead to a better credit score and provides greater purchasing power in case of emergencies.
However, for people who have a difficult time managing their spending, it could also be tempting. A lower credit limit offers less temptation to spend on purchases you may not necessarily need.
That said, the benefits of a larger credit line outweigh the benefits of having a smaller credit limit. Just do your best to be as responsible as you can by paying off your statement balance each month and not using the higher spending power for unnecessary expenses.
What does your credit limit mean for your credit score?
While having a good credit score will increase your chances of getting a higher credit limit, a higher credit limit can in turn help your credit score.
One of the major aspects that contributes to your credit score, for example, is your credit utilization. Credit utilization is the percentage of your overall credit -- across all of your open accounts -- that you’re using.
So if you have an overall credit limit of $10,000 and you have a credit card balance of $5,000, your credit utilization would be 50%.
When it comes to your credit utilization, a good percentage to keep in mind is 30%: Your credit utilization contributes to 30% of your credit score, and staying below 30% credit utilization will have the best impact on it.
Having a smaller line of credit can make it harder to maintain a healthy credit utilization. The higher overall credit line you have, the easier it will be to keep your credit utilization in that 30% range, and the better your credit score will be because of it.
Can you increase your credit limit?
There are two paths you can take to increase your credit limit. You can wait for your issuer to reach out to you with an offer after it reviews your account, or you can request a credit limit increase directly from your credit issuer.
In either case, you’ll want to have an established history of responsible card use, which means using your card frequently while keeping your credit utilization ratio in check without missing any payments.
“Sometimes too much unused credit is viewed unfavorably by a card issuer. The theory is that available credit represents a risk for the issuer, and if the credit line is sitting there not making much money, the issuer might rather offer it to someone else,” Rossman said.
Credit card issuers may reach out to you after an undisclosed length of time to make adjustments to your credit account based on your credit reports with the three major credit bureaus: Equifax, TransUnion and Experian. According to Experian, credit card issuers could review your account every six to 12 months. Following the review period, the issuer may offer to increase your credit limit.
Alternatively, if you’re looking to decrease your overall credit utilization ratio, you can apply for more credit cards to increase your total available credit. In that way, the best high-limit credit cards can help pad your credit score.
How to request a credit limit increase
If you’d rather not wait for the issuer to decide on its own, you can request a credit limit increase by calling the number on the back of your credit card. Most issuers also let you request a limit increase online or via the mobile app.
“You probably want to have a credit card for at least six to 12 months before requesting that first increase,” Rossman told CNET. “You’re especially likely to be successful if your income has increased, your credit score has increased and/or if your debt-to-income ratio has decreased. Plus, it will also increase your chance of success if you’re a good customer who uses the card frequently and pays on time.”
When requesting an increase, in addition to knowing how much of an increase you’re looking for, it’s important to have at the ready the necessary information the issuer may request. That could include your annual income, employment status and monthly rent or mortgage payment. Keep in mind that requesting a credit limit increase could also result in a hard credit check, which negatively impacts your credit score.
It’s also a good idea to have solid reasoning behind why you’re requesting a higher credit limit, in case the representative asks, and to point out your history of on-time payments with regular card use.
When should you request a higher credit limit?
A good time to request a credit limit increase is following an improvement in your financial health. That could mean a higher income or a better credit score. You could also request a limit increase if you’re looking to improve your credit score by lowering your credit utilization.
However, you may want to consider a secured credit card first if you’re trying to rebuild or establish your credit. Secured credit cards offer credit lines based primarily on the security deposit you put down, rather than your credit score.
The bottom line
Keep these tips in mind when it comes to utilizing a higher credit limit:
- Be aware of your credit limit.
- Use your card regularly, pay more than the minimum, and avoid spending up to your credit limit.
- Budget yourself.
- Keep your credit utilization below 30% to have a positive impact on your credit score.
- Request a higher limit if your spending habits change or your financial health improves.
The higher the credit limit, the better off your financial health will be if you can control your spending. While a higher credit limit can be more to manage and tempting to use for unnecessary purchases, it can have a greater positive impact on your credit score when used responsibly.
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