Key Takeaway: Your credit limit represents an important piece in your overall financial picture. Credit card companies determine your credit limit based on several factors, but you have some power to control your own credit limit, too.
It’s good to know your credit limit so that you know how much you can borrow at any given point in time. But it also plays a key role in determining your credit scores. Carrying low balances relative to your credit limit shows lenders that you can manage debt well.
Often, people assume that your credit limit is a fixed number, since your lender chooses your credit limit when you apply for a card. But you have more power to adjust your credit limit than you might think, especially if you know what factors influence the credit limit on a credit card, such as your income, credit scores and your history with the card issuer. You can use this information to increase your borrowing ability and to build stronger credit.
- What factors influence the credit limit on a credit card?
- How can I increase my credit limit?
- How do credit limits affect your credit scores?
- FAQs about credit limits
What factors influence the credit limit on a credit card?
Credit card issuers look at your creditworthiness when setting your credit limit, such as your credit scores, income, payment history and more. They also consider factors outside of your control, like which type of card you’re applying for, how well the economy’s doing and business pushes to garner more customers.
Credit scores
Credit card issuers use your credit scores for several different lending decisions, including whether you’re approved, how much you’ll pay and how much you can borrow. Generally speaking, higher credit scores mean you’re more likely to get a higher credit limit, a lower interest rate and have a higher chance of approval for financial products.
Credit history
Beyond just your credit scores, credit card issuers will look at the details within your credit report, too. You’re more likely to receive a higher credit limit if you have a history of on-time payments, for example. But if a lender sees that your credit limit has recently been downgraded on another card, that could negatively impact how much they’d be willing to let you borrow, too.
Credit utilization ratio
Credit card issuers pay particular attention to how much you’re using any other existing credit cards you might have. If you’re using a higher percentage of your available credit — known as your credit utilization ratio — then you might receive a lower credit limit when you apply for a new card or request a credit line increase on a current one.
Income
A credit card issuer won’t let you borrow more than it thinks you’ll be able to pay back, and so that’s why they also strongly consider your income when setting your credit limit. They also consider how much of your monthly income goes toward other debts — known as your debt-to-income, or DTI, ratio — when setting your credit limit. In general, the higher your income and the lower your DTI ratio, the higher your credit limit will be.
Credit card type
Some credit cards are designed for new credit users, such as student credit cards, which typically feature lower credit limits. Secured credit cards also typically set your credit limit equal to the size of your refundable deposit. If you make a larger deposit, you’ll receive a higher credit limit.
Economic environment
Credit card issuers often react to economic challenges, such as recessions, by tightening their purse strings. If you apply for a new credit card during these times, you might get a smaller credit limit than in more prosperous times. Sometimes, credit card issuers react by lowering credit limits on your existing cards, too.
Credit card issuer business decisions
Sometimes credit card companies want to expand their businesses. Aside from offering things like sign-up incentives and flashy marketing, they can also drum up more business by offering larger credit limits, too.
How can I increase my credit limit?
Your credit limit — across individual cards and your combined credit limit — isn’t set in stone. You’re always free to ask your credit card issuer to increase your credit limit, and you’re free to apply for new credit cards at any time, too.
But in practice, it’s good to be strategic about increasing your credit limit. Make sure you’re doing it for the right reasons, and that you have a handle on managing your debt, first. If you only want to increase your credit limit because you’re already maxing your cards out beyond what you can afford, it’s best to focus on paying down your debt, first.
When you’re ready, here are a few proven strategies for increasing your credit limit:
Apply for another credit card
Opening another credit card can increase your combined credit limit and lower your credit utilization ratio, an important factor in determining your credit scores. Don’t open a new credit card if you’re applying for other credit soon, though, like a mortgage.
Make sure your credit reports are accurate
Card issuers report your credit limit to each of the three credit bureaus (Equifax, Experian and TransUnion), who then list it on your credit report. That’s how other lenders know your current credit limit. Sometimes they make mistakes, though, so it’s good to check your credit reports, especially before applying for new credit. If your credit limits aren’t reported accurately, you can dispute the information to correct it.
Request a credit line increase on current credit cards
If the economy’s still doing well and you have strong credit and income, you can often request a credit limit increase as soon as a few months after opening a new card. After that, you may be able to request an increase every six months, depending on the issuer.
How do credit limits affect your credit scores?
Your credit limit, on its own, doesn’t factor into your credit scores. But when it’s combined with your credit card balance, it can have a significant impact on your credit scores. This is called your credit utilization ratio, and here’s how to calculate it:
Credit Card Balance ÷ Credit Card Limit = Credit Utilization Ratio
For example, if you’re carrying a balance of $500 on a credit card with a $1,000 limit, your credit utilization ratio is 0.5, or 50%. In general, experts recommend keeping your credit utilization ratio under 10%, if possible, to avoid negative impacts on your credit scores.
You can calculate this number for each individual credit card, and for all credit cards combined. Both ways of calculating your credit utilization ratio can impact your credit scores.
Next steps
Your credit limit sets the baseline possibilities for how much you can borrow with your credit card. But how you use your credit limit shows lenders whether you’re capable of handling other financial responsibilities, too, like renting an apartment or taking on a mortgage.
If you’re looking to increase your credit limits, start by building a stronger financial profile. Building better credit is a great start, which you can do by ensuring you always pay your bills on time, as well as paying down other debt. Keep credit cards open even if they’re paid off, too. Increasing your income can also help, such as by taking on a side hustle or part-time job, switching careers, or asking for a raise at work.
FAQs about credit limits
You might receive a low credit limit for several reasons, such as if you earn a lower income, have lower credit scores or if you’re using a secured credit card. Sometimes it’s due to factors outside of your control, such as if the economy’s doing poorly, or if the credit card issuer is just being more cautious in general.
A $1,000 credit limit isn’t good or bad on its own. It’s simply the amount of money that a credit card issuer is willing to let you borrow. If you’d prefer a higher credit limit, you can request a credit line increase from your credit card company, as your income and creditworthiness grow.
Your credit scores may decrease if you use up your entire available credit limit. That’s because your credit utilization ratio — how much of your available credit you’re currently using — is a key factor in your credit scores, and maxing out your credit cards can make you appear riskier to lenders.