Credit Limits: 7 Important Facts You Should Know

Your credit limit is an essential part of understanding how to use credit, and understanding how your credit limit affects your credit score is important. This limit is set by your lender or credit issuer and is the highest balance you can carry at a given time on a credit card. As you pay off your balance with each billing cycle, your credit limit replenishes and you can again spend up to that amount. It can be tempting to spend up to your limit, but there are consequences for your credit score and financial wellness. 

Credit Card Limits At A Glance

What To Know About Your Credit Limit: 7 Facts

Let's look at several facts to know and understand.

1. Definition Of A Credit Limit

A credit limit is the highest amount of money a cardholder or borrower can spend on a revolving credit account. A revolving credit account allows you to borrow money repeatedly up to a set limit as you repay it in installments. 

Your credit limit is determined by your lender or credit card issuer depending on your credit profile. For example, if your credit card has a credit limit of $10,000, you can only use your credit card for purchases up to that amount. Note that the transactions charged against the credit limit include purchases and the card's annual fees (if applicable). When you pay down your monthly balance, your credit limit replenishes itself and you can continue to borrow up to your limit.

2. How Banks Determine Your Credit Limit

Financial institutions, such as banks and credit card companies, use several factors to evaluate your credit card limit, such as your income, debt, credit score, employment status and payment history.

• Credit score: A credit score is a three-digit number that proves how well you've handled borrowed funds in the past. It ranges from 300 (low) to 850 (high) and indicates how likely you are to handle credit now and into the future. The most widely used scoring model is the FICO® Score.
• Payment history: If you have a good history of repaying loans, credit card companies may be more willing to give you a higher credit limit.
• Debt-to-income ratio (DTI): A low debt-to-income ratio (DTI) may result in a higher credit limit. DTI compares the amount of debt you have to your income. If you have a high amount of debt relative to your income, lenders may feel you won't be able to keep up with paying all your outstanding debt.

3. How Your Credit Limit Impacts Your Credit Score

The amount of credit you use up to your limit refers to your credit utilization ratio. The higher your credit utilization, the more it could negatively impact your credit score. Experts recommend keeping your credit utilization at 30% or less.

The major credit bureaus – TransUnion®, Equifax® and Experian™ – offer credit reports that can help you evaluate your revolving credit utilization, the number of accounts with balances open and total credit card debt.

4. How Available Credit Is Different From Your Credit Limit

Your available credit is the current amount you can use based on how much you’ve borrowed – your credit limit stays the same, but your available credit can fluctuate.

Say you have a $10,000 credit limit, but you put $2,000 of purchases on your credit card. In this case, your available credit is $8,000. However, if you pay down that $2,000, your available credit will return to $10,000. In this case, your credit limit is always consistent at $10,000.

5. What Happens If You Go Over Your Credit Card Limit?

You've likely heard the term maxed-out credit card, meaning a borrower exceeds their credit card limit. In most cases, your credit card could be declined if you try to make a purchase but have exceeded your credit limit.

However, some credit card companies approve transactions above your credit limit, but at a cost. Exceeding your credit limit could end up costing you in the form of:

• Fees
• Interest rate increases
• Minimum payment requirement increases
• Requirement to pay the overage immediately
• Cancellation of the card

6. How A Credit Limit Increase Becomes Possible

If you constantly see yourself bumping up against your limit or want to impact your credit utilization, you can increase your current credit limit. You can increase your credit limit by asking your credit card issuer or you can wait for your credit card issuer to offer you a higher limit.

Asking your credit card issuer involves calling or requesting a credit limit increase online. You may need to show that you're responsible enough to handle a larger limit through on-time payments and demonstrate that you can pay down debt. It's important to note that a credit card company might require a hard credit inquiry to determine eligibility for a credit limit increase, which could affect your credit score.

You can also wait for your credit card issuer to offer you a higher limit. Your credit card issuer will typically issue increases to those who have made consistent on-time payments after making regular purchases. You may need to wait at least 6 months after getting a new card before your issuer will increase your credit limit.

7. How To Avoid Spending Over Your Credit Limit

Pros And Cons Of High Credit Limits

The average American had an average credit card limit of $30,365 in credit across all credit cards in 2021, according to Experian's most recent data. Beyond the average credit limit, what are the pros and cons of having a high credit card limit?

The Bottom Line

There’s no “good” credit limit – it’s not a one-size-fits-all metric. Instead, a good credit limit should suit your spending habits and personal requirements. Also, consider keeping your credit utilization at 30% or less which can help keep your credit score in good standing and open other future borrowing opportunities.

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