Cash 1 Blog
What Is a Credit Limit? Everything You Should Know
Credit limit refers to the maximum amount of credit a lender extends to a borrower. All credit cards and lines of credit have a credit limit. The credit limit will vary among individual borrowers based on personal information such as credit score, monthly income, and credit history. Credit limits affect a borrower's credit score and ability to get future credit.
Lenders tend to give higher credit limits to people with good credit, while people with a lower credit score or monthly income tend to be considered credit risks and get smaller credit limits.
Why Does a Credit Limit Matter?
A large part of any credit score is determined by the amount of credit you use. Your cards' balances and limits are calculated to consider your score. A good credit score will allow you to receive financing on a car, a home, or a personal loan.
Keeping your credit card balance low is always a good idea when managing your credit limit. Paying your balance in full every month is the best practice. If you can't, pay what you can afford over the minimum payment to keep moving in the right direction.
How Does Credit Limit Work?
The lenders determine your credit limit when you apply for a credit card or revolving line of credit. A good credit score and monthly income can mean a higher credit limit, while a bad credit score or unsteady income can mean higher interest rates and a low credit limit. So what do lenders want to see when they are analyzing your application? Lenders want to know a person with substantial monthly income, a good credit score, and a low debt-to-income ratio. If you have a low income, lenders may view you as a credit risk; they would either reject your application, charge you a higher interest rate, or assign a low credit limit.
You won't know your credit limit until you have submitted the application form and are accepted for the credit card. If you are unsatisfied with the credit limit assigned, you can ask your lender for a credit limit increase, but it must be a reasonable request depending on your income and credit score. Additionally, if you already have a credit card or line of credit and have been consistent with the monthly payments, you may be offered a pre-approved credit limit increase by your lender.
Credit Limit Examples
A person with a decent credit score and an average income may get approved for a credit card with a credit limit of $4,000. A person with a higher monthly income and a better credit score can get a credit limit of $20,000 or more. How you use the money and whether you exceed your credit limit will make or break your score. How much you use on a credit card or line of credit will directly impact your credit utilization ratio.
How is Credit Limit Determined?
Lenders set credit limits, and several factors affect their decision. Companies could examine your credit reports, credit scores, and credit application. Here are a few questions lenders may ask when considering your application:
- Your income: Will your income cover your monthly bill?
- Your payment history: Do you pay your bills on time? Have you had a debt sent to collections or filed for bankruptcy?
- Your debt: What's the total amount you owe? How much of your available credit are you using?
- Your account history: have you recently applied for an abundance of new credit? How long have you had your current accounts?
- Your current accounts: How many open accounts do you have, and what types are they?
Credit limits don't stay the same during the loan term. If you are unsatisfied with your credit limit, you can ask for a credit increase. In some cases, your lender could decide on its own to increase or decrease your credit limit depending on how you handle your credit card or line of credit. If you make the payments on time consistently and have been using the amount mindfully, your lender could offer you a raise in your credit limit. Similarly, your lender could decrease your credit limit if you are late on payments.
Why Your Credit Limit Is Low
Your credit balances are above 30%
You have a high debt level
You have a history of late payments
You have a low income
You have a history of new credit
What is a Good Credit Limit?
While different lenders have different ranges of credit limits, Recent data from Experian suggests that the average American has access to $27,304 with all of their credit cards combined.
There's no specific percentage that is considered a reasonable credit limit. A credit limit should be suitable for you; someone may not be happy with a credit limit of $10,000, while another person may find that limit reasonable. First-time credit card users may also get assigned a smaller credit limit by lenders to gauge if the borrower can make timely repayments and their spending habits.
Average Credit Card Limits by Generation
|Generation Z (18-24)
|Generation X (41-56)
|Baby boomers (57-75)
|Silent generation (76+)
How Much of My Credit Limit Should I Use?
Borrowers are always advised not to use more than 30% of their credit limit. That 30% mark is considered an ideal credit utilization, and using more than that will impact your credit score significantly. If you have used more than 30% in any month, then make sure you pay it back on time to keep your credit score undamaged.
If your credit utilization exceeds the 30% mark, paying down your credit balance multiple times a month can also help you recover your credit score.
Credit Limit vs. Available Credit
The difference between the credit limit and available credit is the balance on the credit card or line of credit.
The credit limit is the total amount available on your card, including any amount you may have already borrowed.
Available credit is the difference between your account balance and your credit limit, which means available credit is the amount left in your credit account. Once you have reached the credit limit, you will have maxed out your credit card, and your available credit will be zero.
What Happens if You Go Over Your Credit Limit?
A few things can happen if you go over your credit limit. Your card will be declined when you use it. You'll also be charged a fee if you signed up for an over-the-limit coverage program. If you sign up for that program, you could be charged a fee every billing cycle if you exceed the credit limit. Your credit card company must inform you how much those fees will be.
You can sign in online or contact your credit card company to check your status. If you signed up by mistake, you could change your preference anytime. But, you'll need to pay any fees that you were already charged. If your balance stays above the limit after opting out, you might also be charged additional fees.
Credit limits are not constant; your credit limit may get bumped up or down depending on how you handle a credit card. If you are good at payments and have a decent credit utilization ratio, your lender may offer you a raise in your credit limit. These raises can be pre-approved or may require you to fit some criteria to be eligible for the increase. So, it's essential to use your credit wisely and be mindful about not overspending or maxing out your card too frequently. We hope this helps you understand the nuances of the credit limit.
Joseph Priebe takes pride in assisting audiences with his articles to help them make sound financial decisions.
With over ten years of experience writing financial content his goal at CASH 1 has always been creating engaging and easy-to-digest information for anyone searching for immediate or long-term monetary solutions.
When Joseph is not writing about personal finance, you can find him photographing the Southwest United States with his 4x5 Graflex Crown Graphic camera. He is based in Phoenix, Arizona.