Using credit limits to your advantage without creating challenges with debt.
Credit cards are a type of revolving credit, meaning they extend to you a line of credit that has a specific limit which renews every month. Every financial institution has rules for how these limits are determined, so it’s essential to understand your credit card terms and conditions to know how they will affect your budget and spending.
What is a credit limit?
A credit limit is the maximum amount of credit extended to you by your credit card issuer. You can’t charge more than your limit on a card in any given month, so it’s like a preset spending limit. This is not to be confused with available credit, which is the difference between your limit and the amount you have already charged that month. Information on your credit card application helps issuers determine your specific limit. If you reach your limit, then your card is “maxed out.”
What affects my credit limit?
There are a variety of factors that go into determining your limit. Lenders use a mix of credit history, income, debt-to-income ratio, and co-applicant qualifications to determine how much credit to extend to you. The type of card may also affect the limit.
Credit History
Your past relationship with credit has a big effect on your limit. If you are new to credit or have a bad history with lenders, you can expect a low limit to start. For example, if you have a history filled with late payments and high balances, you may not get a high limit. In fact, 30% of people with credit scores ranging from 620 to 659 have limits below $2,000.[1]
Long credit histories, a good credit score, and positive financial relationships with lenders usually mean higher limits, which means on-time payments and low balances. A whopping 84% of credit card users with scores of 780 or over get limits that are higher than $10,000.[1]
Income
In most cases, a higher income means a higher credit limit. However, this is not a guarantee and limits can still vary based on other factors.
Debt-to-Income Ratio
Using the information on your credit card application, lenders will determine your debt-to-income ratio and use it to judge your credit limit. If you have high monthly debt payments compared to your income, it’s likely that your lender will set a lower limit for you.
Type of card
Various types of cards have different rules for limits. Companies like Chase, Discover, Citi, and more will all determine their own credit limits for the cards they offer.
Co-applicant qualifications
If you are applying for a credit card with someone else, that applicant’s information will also be used when determining your limit. This can be good or bad, depending on the co-applicant.
What doesn’t affect my credit limit?
Your bank account balance will not affect your limit. Neither do your other assets or the value of your net worth.
How much of my credit limit can I use?
Although we don’t recommend it, you can use all of your limit. If you spend over your limit, though, you may be subject to fees and penalties. Why don’t we recommend using all of the credit extended to you? Because using too much of it can negatively affect your credit score by raising your minimum payment. Your total current balance divided by your total available credit limit reflects your credit utilization ratio on your credit report. Any ratio above 30% hurts your credit score. The higher your credit card balance, the higher your utilization ratio.
Can I change my credit limit?
You can’t change your limit yourself, but you can request credit limit increases from your lenders. Financial institutions make this pretty easy and you can ask them to raise your limit online or call your credit card issuer’s customer service department. After you complete your request, they will notify you if you are approved or denied for a higher limit. Getting denied for a higher limit will not hurt your credit score, and neither will requesting one.
Other cards to know
No preset spending limit cards
Credit cards with no preset spending limit don’t actually mean that you can charge however much you want. Companies set soft limits based on your spending habits and other factors.
Charge cards
Charge cards are similar to cards with no preset spending limit. The only difference is that charge cards require full payments every month and can’t carry a balance.
Secured credit cards
To get a secured credit card, you have to make an initial deposit. The value of your limit usually reflects the value of that deposit. Until you close the account, that initial deposit will remain out of your reach.
The Bottom Line
Raising your limit might sound like a good thing, but it can result in overspending or even credit card debt. You can easily run into fees, penalty rates, and other negative consequences Spending too much on a credit card can not only drain your budget and leave you juggling bills but also hurt your credit score. A high credit utilization ratio or a large amount of debt will have a big effect on your credit report. This could make it harder to buy a home, get a car, or receive a personal loan.
So, the bottom line is this: Especially if you already have high debt, take your credit very seriously. After all, it’s a limit, not a goal.
