How Your Credit Limit Is Calculated
When you are approved for a new credit card, the issuer will determine your account’s credit limit. Many issuers calculate your credit limit using information from your credit report, whereas others have pre-set credit limits that are issued to all new cardholders.
People with higher credit scores and incomes are more likely to receive higher credit limits because they are viewed as less of a credit risk. After all, a high credit score is associated with a track record of timely payments and the ability to repay debts.
Do you want to learn more? Here’s how credit cards work, how credit card companies calculate credit limits, and what you can do to quickly increase your credit card limit.
What exactly is a credit card limit?
The total amount of money you can charge to a credit card is referred to as the credit card limit. If your credit card has a $5,000 limit, for example, it means you can carry a balance on your credit card of up to $5,000. Your credit card limit applies to both new purchases and balance transfers, as well as any other transactions that draw on your credit line, such as cash advances. Even your annual fee is deducted from your total credit limit.
According to Experian data for 2021, the average credit card limit per American is around $30,233. This figure represents the total credit available to Americans across all credit card accounts, not the per-card limit. Credit limits range from $2,000 to $10,000 per card in general, though many credit cards for people with bad credit offer lower credit limits in exchange for the opportunity to rebuild your credit score.
How is your credit limit calculated?
One of three methods is used to determine your credit limit. In some cases, you will be given a credit limit. In other cases, your credit limit is determined by your credit history and score. In some cases, a credit card issuer will conduct a more thorough review of your credit history, taking into account any reasons why you might be a potential credit risk and calculating the credit limits you currently have on your other cards.
The credit-based cap
Many credit card companies use your credit score to help determine the limit on your card. This means that your new card limit will be influenced by factors such as payment history, credit utilization, length of credit history, credit mix, and recent inquiries. Issuers will almost certainly consider your household income, employment, and monthly expenses.
According to Bill McCracken, former president of Phoenix Synergistics, a MarketTech company, the process is similar to how issuers determine the interest rate on your credit card. If a credit card offer has a credit limit range of $1,000 to $5,000, those with higher credit scores will receive the $5,000 credit limit, while those with lower credit scores will receive $1,000.
The credit limit that has been established
Some credit card companies provide credit cards with fixed credit limits. A starter credit card might have a $500 limit, whereas a premium credit card might have a $5,000 limit.
“It’s not a highly personalized decision,” said Eric Lindeen, a former CRM Northwest Inc. senior marketing consultant. “If the limit appears to be unusually large or small, it is not a reflection of you as a consumer. You simply applied for the incorrect card.”
What happens if you aren’t satisfied with the credit limit on your credit card? Lindeen suggested requesting a credit limit increase from the card company. Some issuers allow for some wiggle room, but he doesn’t expect an increase of more than 10% to 20%.
The personalized credit limit
Some credit card companies use a combination of variables to generate a unique credit limit for each new applicant. This allows credit issuers to reduce risk when extending new lines of credit.
Some issuers, according to Lindeen, create a grid system and compare several different types of scores, such as a credit score and a bankruptcy score, to determine a credit limit. Others base a credit limit on your income or debt-to-income ratio. Some issuers may even consider the limits on your other credit cards, which can be found on your credit reports, according to John Ulzheimer, a nationally recognized credit expert who previously worked for FICO and Equifax.
What if you try to spend more than your credit limit?
Consider going over your credit card limit. Consider again. If you try to spend more than your credit limit, your transaction will usually be declined. Over-limit transactions were once permitted by some credit card issuers in exchange for high over-limit fees, but this practice has largely been discontinued.
It’s important to remember that the closer your balance gets to your total credit limit, the worse your credit score will be. Because the amount of available credit you are currently using accounts for 30% of your FICO credit score, maxing out your credit cards can have a significant negative impact on your credit score.
How to Boost Your Credit Limit
Increasing your credit limit has numerous advantages. You not only gain purchasing power, but you also have the opportunity to improve your credit score by increasing your available credit and decreasing your credit utilization ratio.
Furthermore, because some lenders use your current credit card limits in their credit limit calculations, having higher credit limits on your current credit cards may result in higher credit limits on future card offers.
You can raise your credit limit in two ways. You can either wait for your credit card issuer to offer you a higher credit limit, or you can request one on your own.
Let’s take a closer look at both options:
Wait for your credit card company to increase your credit limit.
If you have good credit habits, your credit card company may increase your credit limit. “After you’ve had the card for a while, issuers will probably adjust your limits based on your usage patterns,” Ulzheimer said.
These changes may increase your credit limit, but they may also reduce it, depending on how you’ve been using your credit cards. Credit card companies review accounts and obtain credit reports on cardholders to assess their current credit behavior and potential credit risk. Issuers may do this on an annual basis, or a late payment on a card may trigger a review, according to McCracken.
Request an increase in your credit limit
If you don’t want to wait for your credit card company to increase your credit limit, you can always ask for one yourself. Many credit card companies allow you to request credit limit increases via your online account or the issuer’s mobile app. Otherwise, consumers can contact their issuers and request an increase.
When requesting a higher credit limit, make sure your credit card company is aware of any recent changes in your financial situation that may influence their decision, such as a higher annual income or a recently improved credit score.
If you have a history of on-time payments and low balances, your credit card company will most likely give you the increase as a “good-faith gesture,” according to Lindeen. However, if you’ve been late on payments, don’t bother calling — and don’t ask for a higher credit limit if your current credit limit is maxed out.
How does your credit card limit get set? Some credit card companies provide predetermined credit limits to all new cardholders. Other credit issuers base your credit limit on a number of factors, including your credit history and credit score.
How do you raise your credit limit? You can usually request a higher credit limit by filling out an online form or calling the customer service department of your credit card. You can also simply maintain good credit habits and wait for your issuer to extend you a larger credit line.