What Are Credit Limits?

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6 minutes read

Category: Credit Cards
Posted on: 07/22/2021
a woman smiles while holding her credit card and sitting in front of her laptop in her office

It’s exciting to get a shiny new credit card and open a brand new account. Before you get to swiping your brand new card, the first thing you need to know is your credit limit. Your credit limit is the maximum outstanding balance you’re allowed to have on your card at any point (without being hit with a penalty).

According to data collected by the Boston Federal Reserve, more than 70% of Americans have credit cards, but how many of them know their credit limit? Knowing your card’s credit limit is crucial to maintaining a healthy credit score, and having an excellent credit score and history can grant you access to better interest rates for loans and approvals.

How to Find Your Credit Limit

When you open your new credit card account, you should receive documentation from the credit card company in the mail stating your credit limit. You can log in online to your credit card account and check to view your credit limit there, too.

When you receive your monthly billing statements, your credit limit may be viewable on the documentation, or if you signed up for e-statements, you can check your limit online.

Finally, you can always call your credit card company (the back of your card should have a toll-free number for customer service) and ask a representative what your credit limit is.

Ways to check your credit limit:

  • Initial documentation you receive online or in the mail from your credit card company when you open your account
  • Monthly paper statements or online e-statements
  • Calling your credit card company and speaking to a representative

How Are Credit Limits Determined?

Your credit card issuer will determine your credit limit. The card company decides your credit limit when you open your account with them, and it’s based on a variety of factors.

Credit card companies are just like any other moneylenders. Their priority is getting the money they’re lending you back—it’s their biggest concern. Credit card companies thoroughly vet their applicants and issue buffers to protect themselves in case cardholders default on payments. These protections include things like interest, late fees, and of course: credit limits. Card companies don’t want to lend out thousands of dollars to an applicant that doesn’t have a good history of payments or consistently makes late payments.

Every credit card company has different methods in determining a credit limit. Some lenders may tailor limits to your level of income. If you have a stellar credit score, lenders still might not issue you an astoundingly sky-high credit limit because your level of income ultimately dictates how much you can pay off. You may have good credit, but your income caps you off, so you wouldn’t be able to pay off a $100,000 credit limit even if you wanted to, especially if you only make $20,000 per year.

Lenders especially hone in on your ability to pay them back when establishing your credit limit. While income and current debt are examined when making the decision, it’s your integrity in repayments that’s key in setting the credit limit. A strong history of timely payments makes a lender much more comfortable in issuing you a higher credit limit, knowing that you’ll make efforts to pay off your card’s balance each month.

Factors that determine your credit limit:

  • Income
  • Level of current debt
  • Your credit history (your FICO credit score, credit reports, and overall creditworthiness)

Your Credit Limit & Your Credit Score

Most cardholders don’t stop to think about how their credit limits affect their credit scores. While you can freely use the amount given to you for your credit limit, your credit usage can negatively affect your credit score. It’s a factor known as the credit utilization rate or the amount of money you owe compared to the total amount of credit you’re given. Relying too much on your credit can lower your score.

Experts have found that you should keep your credit utilization rate below 30% if you can. You can find your rate by dividing the total amount of your credit card balances by the total credit card limits. The good news is that the higher your credit limit, the higher your credit utilization can be.

If you go over your credit limit, you may get hit with an over-the-limit fee, which could trigger a penalty rate. To see the specifics of these charges, fees, and rates for going over your credit limit, read your credit card agreement. Going over your limit can also negatively impact your credit score.

Improve Your Credit, Increase Your Limit

You can ask your credit card issuer to increase your credit card limit. You may want to increase your card’s limit because you want flexibility in how much you can spend or security in knowing you have a higher amount if needed. You can increase your credit limit by going online and sending a request through the issuer’s website or calling them and speaking to a representative.

When you submit a request, your issuer may conduct something called a hard credit inquiry to see if you’re eligible for an increase. Hard inquiries are when your lender checks your creditworthiness to make any kind of lending decision, limit increases included, and it can lower your score by a couple of points. Fortunately, hard inquiries don’t have a lasting impact on your score, and you can bounce back relatively easily. However, because of the slight point dip, it is something you’ll want to think twice about before sending your request.

Credit card companies have their own unique methods when determining your initial credit limit as well as when they increase them. For a credit card company like Capital One, they’ll increase your credit limit if:

-Your account has been active for longer than three months

-Your account is not a secured card (rather, it is a traditional credit card)

-In the previous six months, you haven’t received a credit limit increase or decrease

Lenders might not automatically give you a credit limit increase like Capital One does for some of their account holders. Instead, they’ll look at traditional lending factors to make their decision to increase your limit or reject your request. These factors are the same as the ones they examine when originally determining your credit limit:

  • Your repayment history
  • Your credit score
  • Your level of income
  • Your employment

For some people, it could be easier to get a new credit card. If you’re in good credit standing, your new card can have a higher limit than the rest of the ones you have. Keep in mind that when you request a credit limit increase or apply for a new credit card, you’ll be subject to a hard inquiry, so your credit score will go down a few points.

A Healthy Balance

Credit limits can be frustrating for those with poor credit or reassuring to those with excellent credit. Wherever you stand with your credit history and current score, know that you can always work to improve it. Making timely payments against your card balances, maintain a low credit utilization rate as much as you can, and striving to eliminate debt and balances are all excellent ways to improve your score.

Finance Guru

Finance Guru