Five Facts About Credit Card Limits

Credit limits can be confusing, but they aren’t complicated. Here are five things you may not have known about them.  

Credit cards provide a convenient way to purchase goods or services. But having a credit card doesn’t mean you can spend as much as you want without any limitations. Most all credit cards come with a credit limit, or credit line, which is the maximum amount of credit a credit card issuer extends to a card member. Once a card member reaches that limit, any additional attempts to make a purchase with that card will likely be declined.

It’s important to understand how your credit card limit works as well as how your credit card limit could affect your credit score. Here are five facts you should probably know about credit card limits (lines).

1. Factors Frequently Considered in Establishing Credit Card Limits

Credit card companies use multiple criteria to determine your credit line, including but not limited to:

• Income: Credit card issuers typically want to know that you’re earning enough to make consistent payments on any purchases you may make with a card they may issue you. If you have a higher income, you may be more likely to receive a higher credit limit.
• Length of Employment: Along with how much you make, card issuers also typically like to see that you have a history of being steadily employed, which suggests financial stability and security. This may make you a more attractive candidate for their credit card than someone with a shorter or less stable employment record.
• Credit History: When you apply for a new account, the credit card issuer typically pulls your credit reports to see how you’ve managed credit in the past. If you have a positive payment history, the issuer may be more willing to grant you a higher credit line than if you’ve struggled to make consistent on-time payments in the past.
• Credit Utilization: This important metric is typically expressed as a ratio that sums up how much revolving credit you’re using compared to how much total revolving you have at your disposal. A lower credit utilization ratio is generally looked upon more favorably by card issuers than a higher one.  
• Debt-to-Income Ratio: This percentage is calculated by dividing your monthly debt by your monthly gross income. It helps potential creditors develop a better sense of how much you owe in relation to how much you make. Just like with credit utilization ratio, a lower percentage is typically more attractive to credit card issuers than a higher one.

2. Your Credit Card Limit can be Easily Found

When you first receive your credit card, your credit limit should be clearly stated in your credit card agreement. If you don’t have that agreement available, you can find your credit limit in the account summary section on your credit card statement, but it may not necessarily say “credit limit.” If it doesn’t, look for a line item that says “total credit line” or “credit access line” or something similar. The amount stated there is the total amount of credit you have access to—and the maximum amount you should be able to charge on your credit card.

3. Your Credit Card Limit can Affect Your Credit Utilization & Credit Score

Because credit utilization ratio is calculated using the sum of your revolving credit lines, if that sum changes by going up or down, so too could the ratio. So, if the limit on your credit card is $2,500 and you have a balance of $250, your credit utilization for that card would be 10%. If the outstanding balance of all of your revolving credit accounts is $3,000, and the sum of your credit lines for those accounts is $15,000, then your total credit utilization ratio would be 20%.

Your credit utilization ratio is one of the factors typically used to determine your credit score, and some experts recommend keeping it below 30%. The closer you get to your credit limit, the higher your credit utilization ratio on that credit card will be, which could also change your total utilization percentage. An increase in your total credit utilization ratio could negatively affect your credit score, and a decrease in that ratio could positively affect your credit score.

4. Your Credit Card Issuer May Lower Your Credit Card Limit

When you open a credit card account, the credit card issuer determines what your credit limit will be. But that doesn’t mean the limit will stay where it is the entire time your account is open. As long as it’s within the terms of your cardholder agreement, and the law allows it, your card issuer can lower your credit card limit at their discretion. 

This could happen for a number of reasons, including but not limited to:

• You haven’t been making regular, on-time payments on the account
• You’re spending more than usual
• Your income has been reduced
• Broader economic factors have increased the risk of customer default

5. You May be Able to Increase Your Credit Card Limit

Not only can a credit card issuer lower your limit at their discretion, they can also raise it. Some issuers might offer you a credit line increase periodically or even increase your credit card limit automatically if they see positive activity on your account, such as consistently making your payments on time or keeping your credit utilization low. If you get a raise and update your income information, this could also trigger an increase in your credit card limit.

If the card issuer doesn’t offer you a credit line increase or increase your limit automatically, you can always request one. Your request can be made over the phone, or your card issuer may also offer the option to request an increase online. There’s no guarantee the credit card issuer will agree to raising your limit, but they may be more agreeable if you have a good reason for requesting one and you’ve consistently been making on-time payments of at least the minimum amount due.

Knowing what your credit card’s credit line is and understanding how it could affect your credit may help you to use your card more responsibly. If you have a lower credit card limit, you may want to concentrate on keeping your credit utilization low and making consistent, on-time payments on the account. If you have a higher credit card limit, you may need to be diligent about not overspending and keeping your credit utilization ratio down. But no matter what your credit card’s limit, using the card responsibly could help you to build and/or maintain a positive credit history.