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Your credit card's credit limit is the predetermined maximum balance that your card can have at any point. Once the balance reaches the credit limit, the creditor might decline additional purchases, cash advances and balance transfers. However, card issuers can choose to allow additional transactions to go through, and you can free up available credit by paying down your balance.
How Credit Card Companies Determine Credit Limits
Credit card issuers want to offer you a high enough credit limit that you'll be able to use the card, but not so high that you won't be able to afford your payments. To accomplish this, they look at various factors when determining the credit limit on new and existing accounts, including:
- Your credit history and score: Card issuers may review your credit reports and credit scores to understand the likelihood that you'll make your monthly payments on time and whether you tend to carry credit card balances. Better credit scores can help you qualify for higher credit limits and lower interest rates.
- Your income: Card issuers also need to be sure you can afford to make your credit card's minimum payments, which means getting a high credit limit will be difficult with a low income.
- Your debts and debt-to-income ratio: Creditors consider your existing debts and debt-to-income ratio (DTI). After all, even if you make a six-figure salary, you may not have room in your budget for a new credit card payment if most of your income already goes to other bills.
- Your relationship with the card issuer: Card issuers consider how much credit they're extending to you overall—across all the credit cards—along with your history of making (or missing) payments, and the potential that you'll open additional accounts with them in the future.
- The current economic environment: External circumstances can also be important. For example, card issuers might lower credit limits if they're worried about a recession.
- The creditor's business goals: Card issuers may take different approaches to managing credit limits depending on their goals and the types of customers they want to attract.
Card issuers may use automated systems that consider these factors, determine your initial credit limit and suggest when to increase or decrease credit limits.
How Your Credit Limit Can Impact Your Credit Scores
Your credit cards' credit limits can directly impact your credit scores because they affect your credit utilization ratio—an important scoring factor. Assuming your credit card's balance stays the same:
- A credit limit decrease can increase your utilization rate and hurt your scores.
- A credit limit increase can lower your utilization rate and help your scores.
To find the utilization rate of an account, review the credit card balance on your credit report and divide it by the account's credit limit. For example, a credit card that has a $1,000 balance and a $4,000 credit limit has a 25% utilization ratio.
To calculate your overall utilization, use all the balances and credit limits for your credit cards―and other revolving accounts―on your credit reports.
What Is a Good Credit Limit?
Ideally, you can qualify for a credit card with a high enough limit that you can use the card for everyday spending while maintaining a low utilization rate—under 10% is a helpful rule of thumb.
In other words, if you tend to spend $2,000 on monthly card expenses, you might want a card with a $20,000 limit. Card issuers usually report your balance several weeks before your bill's due date, which means you can have a high utilization ratio even if you pay your bill in full each month.
However, it might be difficult to qualify for such a high-limit account, particularly for younger and low-income cardholders. In general, older cardholders have higher credit limits.
|Change in Average Credit Card Limits by Generation
Source: Experian data from Q3 of each year
Keeping credit cards open can also help you maintain a low utilization rate, which is why closing cards is generally a bad idea, unless you tend to overspend or the card has an annual fee.
How to Increase Your Credit Limit
There are several ways to increase your credit limit:
- Request a limit increase. Use your online account, app or call the card issuer and ask for a credit limit increase. But review the terms first, because sometimes the request will result in a hard credit inquiry.
- Update your income. Update your account information with your new annual income whenever you get a raise or start earning extra money. Card issuers may proactively increase your credit limit when your income rises.
- Improve your credit score. Card issuers also might increase your credit limits if your credit scores improve.
- Move credit limits. You may be able to transfer credit limits between cards if you have several credit cards from the same issuer.
Higher credit limits can help you maintain a low utilization rate and give you enough spending power to make larger purchases and cover emergency expenses. However, higher credit limits can be dangerous if you tend to overspend.
Why Your Credit Limit Might Have Changed
For many card issuers, managing credit limits is an ongoing process. They periodically evaluate their goals and the economic environment, and will frequently review your credit reports to see how you're using credit.
For example, the company may lower your credit limit if:
- Your credit score drops
- You miss payments
- You take on more debt (including debts from other creditors)
- You don't use the account often
- Your spending behavior changes
- Your income decreases
On the other hand, creditors may increase your credit limit when:
- Your credit score improves
- Your income increases (and you report the increase)
- You have a good history of paying your bills on time
- You request a credit limit increase
Some actions can be interpreted differently depending on the circumstances. For example, a credit card issuer might lower your credit limit if you're revolving a balance and it thinks you'll struggle to afford larger payments. Or, it might raise your limit if it thinks you'll likely spend more money and can afford higher interest payments.
What Happens When You Go Over Your Credit Limit?
Two things can happen when your credit card's balance reaches its credit limit and you try to make a purchase:
- Your transaction gets declined. The card issuer can decline the transaction and your purchase will not go through.
- Your transaction gets approved and your minimum payment increases. The card issuer can choose to approve the transaction. The amount you go over your card's credit limit may be added to your minimum payment for the billing cycle.
If you're close to your credit limit, you can free up available credit by paying down your current balance or getting a credit limit increase.
Card issuers may also consider how often you go over your credit limit when deciding whether to change your credit limit. Some newer credit scoring models may also consider how often you go over your limit when calculating your score.
Monitor Your Credit Limits and Utilization
Get your Experian credit report for free and benefit from helpful analysis. For example, you can use the credit overview section to see your overall revolving utilization, how many accounts you have with balances and your total credit card debt. And if you want to open a new credit card to increase your overall available credit, Experian CreditMatch™ can match you with card offers based on your unique credit profile.
Learn More About Credit Limits
- How to Increase Your Credit Limit
Increasing your credit limit gives you more buying power and can help build your credit score. You can request a credit card increase online or by phone.
- What Happens When You Go Over Your Credit Limit?
When a transaction exceeds your credit limit, it may be approved, but you could face a fee or other consequences. Your credit score may also be affected.
- How Much Available Credit Should I Have on My Credit Cards?
Your available credit on your credit cards can have a big impact on your credit score. Here's what to consider and how to find the best level for you.
- What’s the Average Credit Limit on a Credit Card?
The average credit limit increased to $30,365 in 2020. Here’s how your credit limit is determined, and how you can try to get an increase.
- When to Ask for a Credit Limit Increase or Get a New Credit Card
If you want to increase your available credit, you may wonder if it's better to request a credit limit increase or open a new card. Here's what to know.
- What Is Available Credit on a Credit Card?
Your available credit is what you have left to spend in any given billing cycle. But should you spend it? And how “available” is it really?
- Does Requesting a Lower Credit Limit Hurt My Credit Score?
Requesting a lower credit limit might hurt your credit scores. But sometimes it might be a good idea, and you may be able to offset the potential damage.
- Can You Transfer Credit Limits Between Credit Cards?
If you have two credit cards with the same card issuer, you may be able to transfer some of your available credit from one card to another.