Understanding How Credit Card Limits Work

Let’s dive into how credit limits work!

Many credit card companies look at your credit report to figure out your credit limit, but some have set limits for all new cardholders.

What is a credit card limit?

A credit card limit is the maximum amount you can spend or borrow on your card.

For instance, if your limit is $10,000, that means you can charge up to that amount for purchases or carry a balance.

This limit includes everything—from everyday purchases to balance transfers and cash advances. Plus, remember that any annual fees will also be deducted from your total limit.

If you want to have a better look on your credit score, you can have access in the Annual Credit Report, take a look.

How do credit limits work?

Lenders typically figure out your credit limit after you apply for a credit card. Just like deciding whether to approve or deny your application, they look at your overall creditworthiness to set that limit.

This means they’ll check your credit reports and take a closer look at your credit history.

If you have a solid credit score and a good income, you’re more likely to get a higher limit because you’re seen as a lower risk.

After all, a high credit score usually means you have a history of paying your bills on time and managing your debts well.

Let’s see how card issuers calculate them, and what you can do to quickly increase your credit limit.

How is your credit card limit calculated?

Several factors come into play when determining your credit limit. These include your income, monthly expenses, and any debts you might have, like mortgages or personal loans.

They’ll also consider how much credit you have available on other cards. Additionally, your payment history plays a role, along with the issuer’s current lending policies.

The Set Credit Limit

You’ll find that some credit card companies offer cards with fixed credit limits. For example, if you’re starting out, you might get a card with a limit of $600.

On the other hand, if you go for a premium card, you could have a limit as high as $7,000. It’s all about what fits your needs!

What Happens If You Go Over Your Credit Limit?

If you happen to go over your credit limit, your transaction might get declined.

But if it does go through, you’ll likely face a fee for exceeding your limit, which isn’t great for your credit score and could make it harder to get credit in the future.

If this becomes a regular thing, your credit limit might be lowered, and the issuer may even ask you to pay off your balance before they close your account.

Plus, you could lose any sweet promotional rates you were enjoying!

To steer clear of these problems, it’s smart to keep an eye on your credit limit.

You can check it in your online account, see it on the paperwork that comes with your card, or find it on your monthly statements.

Does Your Credit Limit Impact Your Credit Scores?

Definitely! Your credit limit is closely linked to your credit utilization ratio, which shows how much of your available credit you’re using across all your revolving accounts.

This ratio plays a big role in determining your credit score.

The Consumer Financial Protection Bureau (CFPB) suggests keeping your credit utilization under 30%, and they recommend paying off your credit cards each month to help keep that number low.

Having a higher credit limit can give you the flexibility to spend a bit more while still keeping your utilization ratio in good place, which can boost your credit score.

But with that added freedom comes more responsibility. A high credit limit can make it easier to rack up debt quickly, which might hurt your scores if you’re not careful.

Just remember, credit utilization is only one piece of the puzzle when it comes to building a strong credit score!

Like this content? We invite you to learn more information about credit cards by reading our following article about how to build your credit from scratch.

Written by

Everaldo Santiago