In America, it’s very common for people to have credit—especially with credit cards. According to ValuePenguin, 67% of Americans had credit cards in 2019. However, not all these people know their credit limits. Once you’re approved for credit, you will be notified how much credit you were given. This is your credit limit. But do you actually know what a “credit limit” is?
A credit limit is the maximum amount a financial institution, like a bank or a credit card company, lets you borrow (with the assumption that you’ll use it and pay it back).
Unlike an installment loan that has a fixed number of payments, a credit card offers a loan with a predetermined spending limit that automatically renews as the debt is paid off. Without knowing your credit limit, it can be very easy to spend more than you’ve been given which can lead to some pretty high fees. Thankfully, your credit limit can change for the better. However, in order to change your credit limit, you’ll need to understand what goes into determining your limit.
All credit limits are different and each one is determined on a case-by-case basis.
Generally speaking, lenders set your credit limit at the amount they believe you could realistically pay back. This is why potential lenders look at your financial history, which includes your income level, current debt, and credit score. They may also look at factors like how much you pay for rent, your employment history, and even your age.
Basically, lenders want to ensure that you’re a trustworthy candidate. That’s why they review your financial history to determine how much they want to lend you and how much you’ll be able to repay. Generally, the most important factor a lender will look at is your credit score. This is the most accurate evidence of your borrowing history, and it helps lenders see how you’ve handled previous credit.
Your credit score and credit limits go hand in hand because your use of credit directly impacts your credit score. The better your credit score, the more likely you are to receive a higher credit limit. In 2019, the average credit score in the U.S. was 703, meaning that most Americans are in good credit standing and are able to manage their credit well.
Knowing your credit limit is important since using too much of it can hurt your credit score. It’s advised that you keep your credit balance below 30% of your available credit to avoid hurting your credit score.
You also have to consider your credit utilization ratio—the ratio of the credit you’ve used (your balance) to your total credit limit. The lower your ratio, the higher your credit score will be. A low credit ratio indicates that you’re not using too much of your credit limit, which, in turn, can help you increase your limit.
As with so many things regarding specifics of your credit, it depends on your lender. Typically, a good place to start is demonstrating your ability to repay.
Work on increasing your credit score. Having a good credit score is the best way to raise your credit limit because your score shows lenders how risky it would be to lend you money. Increasing your credit score demonstrates that you’re responsible and may encourage them to lend you larger sums of money.
Never miss payments or pay late. Consistently making your payments on time shows lenders that you’re able to keep track of your spending and are working to pay credit back. Additionally, some financial institutions will increase your credit limit when they see that you’re making consistent payments and maintaining a low balance.
Just because you can, it doesn’t mean you should raise your credit limit. Increasing your credit limit could raise your credit score, but only if you don’t increase your monthly debt along with it. There’s also a difference between a lender increasing your limit on its own and you asking for a higher limit. Requesting a higher limit could require a credit check to make sure you are eligible, which may negatively affect your credit score.
Always consider how much you can really afford. A larger credit limit could trigger you to overspend and accumulate more debt. Always consider how it will affect your overall financial situation and review all your options before asking for an increase.
Your credit limit determines the total credit you have available. Credit limits are based on your financial past—especially your credit score. Knowing your credit limit is essential to managing your overall credit and increasing your credit score. Having a high credit limit is ideal as it allows you to use more of your credit without hurting your credit score.
It’s important to keep in mind that if you do have a high credit limit, you should be careful not to overspend. While having a higher credit limit means having more money to use without lowering your credit score, it can make credit harder to pay back. For this reason, it’s essential to avoid using more credit than you can handle.
You can also use your credit limit to help increase your credit score by keeping a low balance and making consistent, timely payments. Doing so shows the lender that you’re not a risk and may make them more inclined to offer you more credit.