The Ultimate Guide to Credit Cards
Tuesday, November 5, 2024

What is a Credit Limit? How Credit Card Issuers Determine the Maximum Amount You Can Borrow

What Is A Credit Limit
Eric Bank

Writer: Eric Bank

Eric Bank

Eric Bank, Finance Expert

Eric Bank is an M.B.A. who has covered financial and business topics since 1985, appearing regularly on Credible, eHow, WiseBread, The Nest, Zacks, Chron, BadCredit.org and dozens of other outlets. Eric specializes in taking complex subject matters and explaining them in simple terms for consumer audiences, particularly in the world of personal finance. Eric holds a Master's in Business Administration from New York University and a Master's in Finance from DePaul University.

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Austin Lang

Editor: Austin Lang

Austin Lang

Austin Lang, Marketing Editor

Austin Lang has worked in writing and academia for more than a decade. He previously taught writing at Florida Atlantic University, where he graduated with a Master’s degree in English. His past experience includes editing and fact-checking more than 500 scientific papers, journal articles, and theses. As the Marketing Editor for CardRates, Austin leverages his research experience and love for the English language to provide readers with accurate, informational content.

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Jon McDonald

Reviewer: Jon McDonald

Jon McDonald

Jon McDonald, Contributing Editor

Jon leverages 15-plus years of journalism expertise to inform financial consumers about emerging trends and companies making an impact in the industry. He is most knowledgeable in the areas of budgeting, credit card rewards, and responsible credit use. Jon has a passion for writing and editing, and his articles have appeared in publications produced by The New York Times.

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Opinions expressed here are ours alone, and are not provided, endorsed, or approved by any issuer. Our articles follow strict editorial guidelines and are updated regularly.

When I was 13 years old, I clearly remember my mother sitting me down and telling me I could be whatever I wanted to be when I grew up — I had a limitless future. Fast-forward a lifetime, and that nice sentiment, unsurprisingly, has not withstood the test of time.

Life is filled with all sorts of limits, including financial ones imposed by credit card issuers.

A credit limit refers to the amount of credit you can charge on your credit card. It represents your maximum borrowing capacity, and the amount typically depends on your creditworthiness and income.

A credit limit is the maximum amount a credit card issuer will allow you to charge on your credit card.

If you’re here, you probably want to know how credit limits work and what factors affect them. Let’s go through that information, and I’ll give you some strategies for effectively managing your credit so you can make the most of your limits.

How Credit Limits Work

Your credit limit is the maximum amount you can charge or borrow with that credit card of yours. Issuers set your credit limits according to how you’re doing financially, and if you’re a trustworthy borrower — they do not want to willy-nilly lend money to consumers who might go belly-up on their debts. 

Getting a handle on how your credit limit works will help you wrangle your spending and keep your credit accounts in top shape.

Influential Factors

Your credit limit is mainly determined by your credit score. The higher you are on the scoring scale, the more you’ve been borrowing money and repaying it on time. That’s why credit card issuers are likely to hand you higher credit limits. But if your score is stuck in the mud, you’re sending a signal that you are a risky bet, so your limit will be lower.

If you’re rolling in more dough than a biscuit factory, and your debts are low, you can afford a higher credit limit because you can repay what you’re borrowing. This is also known as your debt-to-income (DTI) ratio.

Don’t be surprised if the good folks issuing your credit cards ask for proof of income, such as payslips or tax returns, to make sure you aren’t just blowing smoke.

How DTI Impacts Credit Scores

If your DTI is as low as a crawling snake, that’s a sign of good financial health — you can manage your credit and deserve higher credit limits. On the other hand, when your DTI is as high as a kite, you’re stretched too thin. An issuer will set lower credit limits to play it safe.

Most issuers want you to keep your DTI ratio below 36%.

How Issuers Determine Credit Limits 

When you want a credit card, an issuer will eyeball your credit report to size up your credit score, income, DTI, and a few other things to determine how much credit to allow you. Your initial credit limit at account opening represents what the issuer thinks about your creditworthiness based on your application.

Now and then, the card company peeks in on your account to see what’s changed. It’ll check for changes in your credit score, income, or general financial outlook. If they are looking good, the issuer may bump up your credit limit.

On the other hand, if things go south, it may tighten your limit. Typically, issuers review credit limits every six to 12 months.

Setting Credit Limits Graphic

An issuer may increase your credit limit if you’ve been using your card responsibly. That means you are making your payments on time and not doing anything to worry the card company. 

A credit limit increase can come out of the blue based on your good credit performance. But every so often — say once every six months — you can test the waters by asking for more credit. You should wait until you’re riding high, maybe because you got a raise or shrunk your debt. That’s when you have the best shot at getting the OK.

How Credit Limits Affect Your Credit Score

Your credit score has a great deal of influence over how much credit an issuer will give you. Your score depends on several key factors, including your debt levels, your history of payments, and the length of time since your credit accounts were opened.

CUR stands for credit utilization ratio, which is fancy talk for the portion of available credit card credit you’re actually using. A low ratio — less than 30% — is good for your credit score but starts to get harmful if higher. A low CUR means you’ve got a handle on your debt and may deserve a larger credit limit.

Here’s an example of how to calculate CUR for someone who has three credit cards and a $10,000 overall credit limit:

Card ACard BCard COverall
Balance$500$0$2,150$2,650
Credit Limit$2,000$3,000$5,000$10,000
Utilization Ratio25%0%43%26.50%

Your payment history is another major piece of the credit puzzle. By paying on time, you prove you’re reliable, prompting issuers to increase your limits. On the other hand, late or totally missed payments can sink your credit score and result in shrinking limits or closed accounts.

Credit Limit vs. Available Credit 

Credit limit and available credit are related, sort of like cousins, but they are different terms. A credit limit is the maximum amount you can borrow on your card. In contrast, available credit is the difference between your credit limit and the amount of money you’ve already used. 

As I mentioned earlier, your credit utilization ratio should be below 30%. You’ll be sitting pretty if you can get (and keep) your ratio that low.

Your overall credit limit sets the boundary for your purchases, balance transfers, cash advances, fees, and interest. Card issuers typically place low limits on cash advances.

Respecting your credit card credit limit is essential to protect your finances and dodge extra costs. Wrapping your head around understanding and managing your limit will help keep it from sinking into the muddy depths.

Strategies for Managing Your Credit Limits 

It takes a bit of planning and forethought to manage your credit. Here’s what you ought to be doing:

1. Budgeting

Careful budget preparation helps keep your spending in check. By sticking to your budget, you will avoid busting through your credit limit like a bull in a china shop. 

Having a well-organized budget helps you plan for the big stuff and avoid impulse buying, which can propel you over your limit faster than a hunted jackrabbit. 

2. Monitoring Expenses

Keeping an eye on your spending will tell you how much money is coming in and going out. Analyze your credit card statements and monitor your mobile banking app to figure out your spending habits. 

Rein in your behavior if things start looking wild. By exercising discipline, you can prevent yourself from losing control over your spending.

3. Avoiding Maxing Out Credit Cards

Repeatedly maxing out your credit cards will raise your credit utilization ratio, damaging your credit score and causing all sorts of trouble. To avoid this, use only a portion of your available credit. Keeping your credit utilization ratio low makes you look good and may earn you higher credit limits.

4. Paying Your Full Balance Every Month

Paying off the total amount monthly makes good sense. It will also allow you to sidestep interest charges and reduce the possibility of being buried in debt. Plus, if you pay the entire balance on time, you will have a low credit utilization ratio and appear less risky to credit card companies.

Consequences of Exceeding Credit Limits 

When buying something above your credit limit, your card may be refused at the register. This is an inconvenient and embarrassing pickle to be in. Being above your limit will mess up your plans, like missing out on one of those one-day store sales.

Some card issuers will hit you with a penalty interest rate if you breach any terms of your cardmember agreement, including late payments and going over your credit limit. 

Exceeding Credit Limit Graphic

These rates are usually higher than a circling buzzard (e.g., 29.9%) compared to the standard ones and will crank up your costs quicker than you can say, “Dagnabbit!” Being a conscientious credit customer will help you steer clear of penalty rates.

Busting through your card limit can fry your credit score. High credit utilization ratios and over-limit occurrences are red flags to credit bureaus and creditors — and they’ll ding your credit scores. The ways to keep your credit in good shape are to stay under your card limit, pay your bills on time, and manage your debt responsibly, like a seasoned cowboy instead of a rodeo clown.

Pros and Cons of Using Overdraft Protection

Credit cards issued by some banks or credit unions may let you dip into your accounts (i.e., checking or savings) to cover credit card overdrafts. It’s like borrowing a cup of sugar from your neighbor if you run out.

Some issuers also offer insurance that covers overdrafts for a set monthly premium. Overdraft protection has its advantages and disadvantages.

Pros

  • Prevents transactions from being declined and the resulting inconvenience.
  • Avoids over-limit fees by covering the shortfall amount. 
  • It can help maintain a good credit history by avoiding over-limit situations.

Cons

  • You may be snagged by additional fees for using overdraw protection or insurance.
  • It can increase debt if you mess up. 
  • Over-reliance on overdraft protection can encourage you to spend too much and fall into poor financial habits. 

Overdraft protection may help you sleep at night, but you should weigh the costs to figure out whether you’ll use it as a safeguard or you’ll push the limits of your account often enough for it to cost you.

How to Raise Your Credit Limit

An increased credit limit gives you more financial workspace and may boost your credit rating. It requires using your credit wisely and knowing when to make your move.

Build Your Credit Scores

Using your credit card wisely every month can grow your credit scores over time, which may justify asking for a higher limit.

Build Credit graphic

Two good habits you should develop are paying your entire balance every month and keeping your credit utilization ratio lower than a hound dog’s belly.

Keeping your finances in check helps raise your credit score. The payoff is increased credit limits, better perks, and lower interest rates.

A strong credit score makes you stand out like the prize hog at the county fair.

Request an Increase From Your Issuer

If you ask, you may get a higher credit limit, but you should have your ducks in a row. The key is to have a strong account history and keep your request modest — shoot for an increase of around 10% to 25%. Be confident but not desperate — that can spook the issuer. 

Request Increase graphic

Give them good reasons why you’re in better financial shape, maybe because of a higher income or lower debt-to-income ratio. This information will ease the issuer’s fear about you managing a credit limit increase.

Don’t throw a hissy fit if you get turned down. Ask the issuer why and pay attention to the answers. This feedback should help you come back stronger and make a better case next time around.

Improve Your Finances 

Find ways to make your bargaining position stronger. Talk up your recent income increase, reduced fixed expenses, and lower DTI ratio if any of that applies.

Improve Finances graphic

Higher income and lower expenses tell the issuer that you can cope with more credit without falling flat on your face. That should let them see the light of reason.

You could bring in more income by getting a raise, taking up a side job, or finding other ways of fattening your wallet. Higher earnings make a strong case for a credit limit increase.

Remember, your income will not be the only factor the issuer will look at when deciding to increase your credit limit. However, it can be one of the most important.

To understand why, it’s helpful to take a closer look at how your income affects card approval in the first place.

To be approved for a card, you’ll need to have some source of regular money coming in. This could be from:

  • A full-time-or-part-time job
  • Financial aid for students
  • Gig-economy side hustle
  • Investments
  • Public assistance
  • Self-employment
  • Social Security or retirement pension benefits
  • Your spouse 
  • Other sources

Issuers must know that the money is coming in steadily before they think about upping the credit limit. They need to confirm that you can at least keep the minimum payments each month without busting a button.

Some of them will even allow you to hitch your wagon to a cosigner with good credit. If you wrangle up a cosigner who’s got a good track record, you might just score yourself a higher credit limit. But keep in mind that cosigners have to be ready to take responsibility for your card payments, so choose wisely. You don’t want that turning into a family feud!

One surefire way to improve your finances is to spend less. Tightening your belt means cutting out the extra stuff you don’t really need and making sure your budget’s tighter than a new girdle. If you can lower the monthly fixed costs — such as housing, utilities, and insurance — you’ll look a whole lot better to issuers eyeing your credit limit.

Another ace up your sleeve is keeping that debt-to-income ratio low. A low DTI ratio is a clear sign that you’re in good shape to take more credit without toppling over. You lower your DTI by paying off what you already owe and staying away from new debt like it’s a snake in the woodpile. All these moves will make your case for a credit limit increase stronger than a team of 20 mules.

Be Aware of Your Credit Card’s Credit Limit

Understanding your credit card limit is like knowing how far your electric car will travel without a recharge — it’ll keep you from making costly mistakes. Watch your spending like a buzzard circling a carcass so you don’t go over that limit. Overdrawing your card will bring on fees and a higher interest rate, and your credit score will drop faster than a rock at the bottom of a well.

Manage that card like it’s your prize mare, keep your finances in good shape, and build a good credit history. Stay on top of your account and read the small print of your credit card agreement — some are full of tricks slipperier than a greased hog. With a little discipline, you can buff up your credit profile and land higher credit limits.