Personal Insights
What is a credit limit and how is it calculated?

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Knowing this number is key to building your credit and using it responsibly.

While it’s important to know your credit score, there’s another number you should be familiar with: your credit card limit. Knowing what that number is and how it’s calculated can help you improve your credit score, prepare for big purchases and make smart choices if you need to use credit to cover an emergency expense.

What is a credit limit?

Your credit limit is the maximum amount you can charge to a credit card, including new purchases, balance transfers, cash advances and annual fees. If you have multiple credit cards, each card has its own limit.

In an ideal world, you would not go over your credit limit because doing so may cause your card to be declined. You then would not be able to use your card again until you paid the balance down below your credit limit. If you’ve agreed to over-limit fees, your card may still be accepted if you go over your limit, but the fee would then be added to your balance. Other potential consequences of exceeding your credit limit include having your limit reduced or being charged a higher interest rate on the card. Your credit score may also go down.

How your credit limit is determined

Most credit card issuers consider similar factors in their credit limit decisions, but each may emphasize one set of factors over another. As a result, it is common to have credit cards with different limits. Here are the key factors credit card issuers use to determine your credit limit.

  • Your ability to pay. Lenders are required by law to consider your ability to pay your debts before extending you credit. That means they have to ask for your income, and many ask for your employment status. Some lenders also look at your debt-to-income ratio. Debt includes mortgage or rent payments, car loans, student loans, other credit card payments and even alimony payments. If you’re spending most of your monthly income on obligations like these, you may get a lower credit limit.
  • Your credit report. When trying to figure out how much credit to offer you, lenders want to know how long you’ve been managing credit, whether you typically pay your bills on time and the credit limits other lenders have given you. All that information is easy to find on your credit report. Also on your credit report is the number of recent hard inquiries—that is, the requests lenders make for your credit file after you apply for credit.

    Multiple hard inquiries in a short period of time could lower your credit score and result in a lower credit limit. Lenders also check your credit report for bankruptcies and delinquent accounts, either of which could lead to a lower credit limit or no approval at all.
  • Your credit scores. There are several credit scoring systems. Although they vary somewhat, they’re based on similar factors, including the length of your credit history, the number and type of loan accounts you have and how much of your total available credit you are actively using.

Factors outside your control

When setting credit limits, lenders sometimes look at factors that have nothing to do with your financial behavior.

For example, some credit cards come with preset, card-specific limits, so everyone who qualifies for the card is given the same credit limit. Retail store cards often have very low limits. During a down economy, credit card issuers may set lower limits for everyone.

This graphic is called, “5 ways to build a better credit score.” The introduction reads, “Your credit limit depends, in part, on your credit score, and your credit score depends on your behavior. While there are multiple credit scoring systems, they are all calculated based on similar factors.” Each of the following tips is paired with a small graphic that represents it. Here are the tips: “1. Pay your bills on time and avoid collections and bankruptcies. Why? Your track record when it comes to paying debts is the single biggest factor in your credit score. 2. Keep your balances below 30% of your credit limit. Why? Your amount owed accounts for how much credit you’re using and how much of your credit limit remains available. 3. Refrain from closing older accounts. Why? Credit scoring systems tend to favor people with longstanding credit accounts. 4. Build a track record of using different kinds of credit responsibly. Why? Your score may be higher if you have multiple types of credit in your credit mix, such as credit cards, student loans and a mortgage. 5. Avoid applying for credit multiple times in a short period. Why? Too many recent inquiries by lenders may have a negative impact on your credit score.”

How to increase your credit limit

If you have a track record of paying your bills on time, your credit card issuer may offer you a higher limit. You can also ask for one. If your income has increased or your credit score has risen recently, those factors might make a lender more likely to approve your request.

Keep in mind that higher limits are not necessarily better. Ask yourself if you need access to a large line of credit. Would higher limits lead you to take on more debt than your budget will allow?

Whether you’re hoping to be offered a higher limit or you want to protect the one you already have, the best thing you can do is show a track record of using credit responsibly.

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