What is a credit limit?

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In a Nutshell

A credit limit is the maximum amount that you can spend with a credit card. Having high limits lets you spend more and can be good for your credit scores, but can also make it easier to overspend and rack up a lot of debt.

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Your credit limit is the absolute maximum amount that your card issuer will let you borrow using your credit card.

Each time you buy something, the amount of the purchase is added to your credit card balance. You can subtract your balance from your credit limit to figure out how much more you can spend using the card. When you make a payment, your balance goes down, and the amount you can spend increases by that payment amount.

According to Boston Federal Reserve data, more than 70% of Americans have credit cards, but some people may never think about their credit limit. If you’re wondering what your credit card’s limit is, you can usually find it by logging into your credit card account. With many issuers, you can also see this information on your credit card statement.

Your credit cards’ limits are important for a few reasons. Higher credit limits offer you more flexibility when it comes to using your card. But they could also make it easier to overspend and wind up in debt. How much of your limit you use can also have an effect on your credit scores.

How your credit limit is determined

One of the top things that lenders think about when giving you a loan or credit card is the likelihood that you’ll pay back the money that you borrow. They don’t want to lend you too much money in case you don’t pay it back, so each lender has its own method of determining the credit limit for each of your cards.

Payment history is a key component of your credit scores. The better your credit scores, the better the chance that a lender will think lending money to you is a good idea. The more comfortable a lender is with lending you money, the higher your credit limit could be, as the lender may be comfortable with letting you borrow more.

Lenders may also tailor your credit limit to your income. Even if you have perfect credit, there’s probably no way you could pay off a $100,000 credit card balance if you only make $20,000 a year. If you have a higher income, a lender may be more likely to give you a higher credit limit.

How credit limits can affect your credit scores

Another important factor in your credit scores is credit utilization rate, or the amount of money that you owe compared to the total amount of credit you have access to. Find your credit utilization rate by dividing the total amount of your credit card balances by your total credit card limits. Experts generally agree that you should keep your credit utilization rate below 30% whenever possible.

Increasing your credit limit can even give your credit scores a boost. If you increase your credit limit but keep your credit card usage the same, your credit utilization rate will go down. This is a good way to try to improve your credit if you’re regularly holding large balances on your cards.

Of course, increasing your credit limits means that you can spend more on your cards, which could make it easier for you to overspend and wind up in debt. This will cost you money and could decrease your credit scores if your credit utilization ratio gets too high.

Learn more: What factors affect your credit scores?

How to improve your credit

You might want to increase your credit limit for a few reasons. For example, you may be looking for more flexibility when it comes to how much you can spend.

The easiest way to try increase your credit limit is to simply ask. Most card issuers let you request an increased credit limit through their website or over the phone.

How to ask for a credit limit increase

But keep in mind that when you request a credit limit increase from your credit card company, they may perform a hard credit inquiry to determine if you’re eligible. This could lower your scores by a few points, or it may have a negligible effect on your scores.

Each card issuer will have its own rules and processes surrounding credit limit increases. For example, Capital One may allow you to request a credit limit increase if the following is true:

  • Your account has been open for more than three months.
  • Your account is not a secured card.
  • You haven’t received a credit limit increase or credit limit decrease in the previous six months.

However, not all requests will be approved. Your card issuer will consider your request much like a request for a new card, considering factors such as …

  • Your payment history
  • Your credit scores
  • Your income
  • Your employment status

If you’re looking to increase your overall credit limits, rather than your credit limit on a specific card, you can also try applying for a new credit card. If you’re approved, your new card will have its own credit limit, independent of the limits of your other cards — but remember, this will trigger a hard inquiry and potentially affect your credit scores negatively.

What if you have an unreported credit limit?

While a lender might report on your account activity to the bureaus, it may not necessarily report your credit limit. And since your credit limits can have a positive impact on your credit scores (especially if they’ve gone up or you’re using less than 30% of your limit), you’ll generally want your lenders to report your limits to the bureaus. If you have an unreported credit limit, here are a few options to consider.

  • Request that a credit limit be reported. Call up your card issuer’s customer service to find out if the issuer might change how it reports your card. Keep in mind that card issuers aren’t required to report to the bureaus, but it doesn’t hurt to ask.
  • Consider opening a new credit card account. If the card that isn’t reporting a limit is one of only a few credit accounts on your reports — and you’re in a position to take on some additional credit — consider opening a new credit card. Make sure you find the best credit card for you and research whether the issuer will report your credit limit to the credit bureaus. Keep in mind that opening a new account will decrease your average age of credit and will add a hard inquiry to your credit reports, which could cause your credit scores to decrease.
  • Decrease usage of the card. While you shouldn’t necessarily close your credit card account, it may be wise to use your card less often while still keeping it active in order to lower your overall credit utilization rate.
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Bottom line

Credit limits determine how much you can spend using your credit cards and serve as a way for lenders to limit the risk of lending money. Having high credit limits can be a good thing, because it gives you the flexibility to spend money when you need to — and it may help you maintain good credit scores.

But having high credit limits can be dangerous, as overspending on a high-limit card may put you into more debt than you can easily pay off.

Aim to have credit limits high enough that you’re only spending 30% or less of your limit, but not so high that you wouldn’t be able to handle the debt if you ever find yourself reaching those limits. Your credit limit should be something to stay far below, rather than a target to hit.

About the author: TJ Porter is a Boston-based freelance writer who specializes in bank accounts, credit, and credit cards. He’s written for Bankrate, CardCruncher, DollarSprout and My Bank Tracker, among … Read more.