The Complete Guide to Credit Limits

complete guide to credit limits

By Eric Rosenberg

When you open a new credit card account, most credit card companies give that account a credit limit. The credit limit is the total balance the card issuer will allow you to carry at any given time. While some cards don’t have a strict credit limit at all, most do use a credit limit. You can think of your credit limit as the maximum amount the issuer is willing to lend you at once.

This number is important for a wide range of reasons that go beyond how much you can borrow. Your credit limits, and credit limits in relation to balances, are a major input in your credit score.

Follow along to learn more about them, how they work, and how you can take advantage of your credit to get the best long-term results for your finances.

What is a credit limit?

As part of the application review process, banks and other credit card companies look at your credit score and credit report. Using the information in your report, generally supplied by one of the three major credit reporting bureaus, the lender chooses your credit limit.

Generally, a higher credit score will lead to a higher credit limit. A lower score will lead to a higher chance of denial, and a lower limit if you do get approved.

While your credit limits are important, they’re not something you should obsess over too much. Each credit card company has its own rules and policies around them. In my own history with credit, I have applied for two cards on the same day at different companies and had widely different credit limits. The importance of credit limits comes more from its impact on your credit score.

If you have a card with a low limit, you shouldn’t rush and close it. You can always ask for a limit increase (more on that below). As long as the card doesn’t charge an annual fee, you should keep it open. It adds to your open credit balances and hopefully contributes to a positive payment history. In the next section, we will take a look at why that open credit card balance matters.

Some cards may have a lower cash credit limit. This applies to cash advances, which are expensive transactions and best avoided. A credit limit for a credit card does not have any specific monthly or annual timeframe. The limit applies as long as the account remains open and in good standing.

If you attempt to spend more than your limit, the credit card company may decline the transaction. Some companies will allow the transaction to go through, but charge you a big over-limit fee. Check your cardholder agreement for details on your own credit card.

Credit limits and your credit score

Your credit score is based on a formula that includes all the information on your credit report. One of those details is your credit limit. Your credit limit alone is not all that important for your credit score, but the percentage of that limit you use is very important.

In fact, your credit balances make up 30% of your credit score, the second biggest factor after payment history. Most experts suggest that you should never utilize more than 30% of your credit limit, but the best credit utilization for your credit score is 0%.

Contrary to a popular myth, you don’t need to carry a balance at any point for an 800+ credit score. To save money on interest, the best thing you can do is pay off your cards in full every month by the due date. That will also build your credit. It’s a win-win!

Your credit score is based on the balance on the day your credit card company reports the balance to the credit bureaus, which include Experian, Equifax, and TransUnion. But if you consistently keep your balances low and pay off your card in full monthly, you’ll be in good shape when it comes to credit.

Whatever you do, don’t treat your credit limit as permission to spend. While you can carry a balance up to the credit limit, that doesn’t mean you should! The best balance for any credit card is $0.

Credit limit increases

Your credit score is made up of your cumulative balances and credit limits across all cards. For example, if you have one card with a $500 balance and $5,000 limit and another card with a $1,000 balance and a $1,000 limit, your credit score looks at it as $1,500 in balances out of a $6,000 limit. This is a 25% utilization rate across both accounts.

There are two ways to improve your credit score at this point. First, and the fastest way to increase your score, would be to pay off the $1,500 in balances. But that’s often easier said than done. Another way to improve your credit would be to increase your credit limits.

If you could increase your credit limit by $3,000 on each card, you would have a $1,500 balance with $10,000 in limits. That is a 15% utilization rate. You would see an instant 10% reduction in credit utilization, which would help your credit score. That is a big benefit with no additional cost.

Increasing your credit limits may be easy. If you keep a good payment history with a card issuer, they are likely to want to offer you more credit. At the same time, maintaining or improving your credit score can motivate a card issuer to extend more credit.

Some credit card issuers allow you to request a credit score increase online. Just log into your account and head to the customer service section to ask for an increase. Some banks make the decision instantly. Others require some time for a response.

When you ask for a limit increase, the credit card issuer may want to review your latest credit report details and most updated credit score. If that’s the case, you may end up with a hard pull on your credit report. This type of inquiry does have a mild negative impact on your credit.

In some cases, you may be asked for a specific credit line increase goal. Estimate your needs on the high end, and feel free to pad the number to make it larger. Try to be realistic, but optimistic, on what’s possible. As we already discussed, there are many benefits to a bigger limit and no major downsides.

If your request is approved, however, that inquiry is well worth it. A loss of a few points of your credit score could be offset by tens of points of increase over time, if not more.

Credit limit decreases

While not all that common, credit card companies are also able to decrease your credit limit. According to the CFPB, creditors can increase or decrease your credit limit at any time with or without notice.

If your credit score goes down dramatically, you file for bankruptcy, or another major negative item shows up on your credit, don’t be shocked if lenders lower limits and close accounts. Even accounts that have been handled well are at risk if you stop paying elsewhere.

If a credit card company does lower your credit limit, you have 45 days to get your balance under that limit before they can charge any fees for going over your limit.

What does “no preset spending limit” mean?

Some credit cards don’t have a set credit limit. If you have one of these cards, a limit may not be reported to the credit bureaus. This is not ideal for your credit score, but if you have a good or better score you shouldn’t worry too much about a negative impact.

With this type of card, the credit card company likely does have a secret credit limit beyond the scenes, but they don’t tell you in hopes you spend more and carry a larger balance on the card. This makes the credit card company more money but doesn’t do much good for you.

If you ever do run into a situation where a charge is declined, call the number on the back of the card to ask for approval on that specific transaction. If you’ve hit the limit that they’re willing to lend, they will let you know.

Keep balances low to save money and build credit

A high credit limit is a great financial resource and tool to build your credit, but that doesn’t mean you should use all of it. You should use as little of your credit as possible to both save money and build your credit.

If you can do that while always making on-time payments, you should be on track for an excellent credit score in the future. You may have to be patient, but you can rest easy that you are doing things right for your credit.

About the Author

Eric Rosenberg is the mastermind behind the Personal Profitability blog and podcast. He has both an undergraduate degree and a MBA in finance and his work has appeared in various media outlets.

Written on March 21, 2019

Self is a venture-backed startup that helps people build credit and savings. Comments? Questions? Send us a note at hello@self.inc.

Ready to join Self?


comments powered by Disqus