The Relationship Between Your Credit Score and Credit Limit
The Relationship Between Your Credit Score and Credit Limit

A key to optimizing your credit is understanding the role your credit score plays in determining your credit limit and how your credit limit will impact your credit score in return.

The seemingly arbitrary way a credit card company decides your credit limit is actually a result of considerable testing and analysis. Underwriting is the process by which credit card companies determine who to approve, at what rate, and at what credit limit. Underwriting guidelines are guarded company secrets because they can significantly impact the profitability of a credit card portfolio. There is little transparency around the credit card industry regarding underwriting requirements, and limited understanding in consumers' impression of how credit limits are determined.

To shed some light on the practice, Credit Karma sampled over 500,000 credit card accounts in June 2009 and compared average user credit limits with their credit scores. This graph below shows a correlation of consumers with a higher credit score having higher credit limits.

The connection of higher credit score and higher credit limit becomes crystal clear when we consider the purpose of credit card underwriting. A cardholder's credit score can, among other details, indicate their risk of defaulting, history of on-time payments, and good (or not-so-good) overall credit management. Using a consumer's credit score, a credit card company can calculate the consumer's expected default rate at any time to help determine whether an increase in the cardholder's credit limit could provide an additional revenue opportunity, or whether a credit line reduction is necessary to reduce risk of losses.

For example, a consumer with a fair credit score may have a $1,000 credit limit with an expected default rate of 10%, making the expected loss approximately $100 (Default rate 10% X Credit limit $1,000). A consumer with an excellent credit score may have a higher $10,000 credit limit with an expected default rate of 1%, making the expected loss approximately $100 as well.

In this scenario, with expected losses being equal, the excellent credit score cardholder is provided a higher credit limit, thanks to their better credit profile with lower default rate, enabling the credit card company the potential for greater profits through credit card purchases, fees, and interest. Not surprisingly, as credit card companies reassess their portfolios, they are continually looking for opportunity to manage their losses whether that is with credit line increases or reductions.

In fact, the spread of underwriting guidelines amongst different credit card companies diversely affects how each issuer sets their cardholders' credit limits. Based on Credit Karma data on the top 5 credit card issuers, Bank of America had the highest average credit limit at $11,288, whereas Capital One had the lowest average credit limit at $3,254. This may be best explained by the difference in the types of consumers they target and their corresponding marketing approaches. Bank of America tends to leverage banking customer relationships by focusing on customers with higher credit scores, which accounts for the greater concentration of high credit limits. On the other hand, Capital One captures a larger segment of the credit spectrum by taking a chance on marginal credit consumers with lower credit scores, which accounts for the concentration of smaller credit lines.

The influence of credit score on credit limit works in a feedback loop: credit score influences credit limit, and a consumer' s total credit available, which is the sum of their credit limits, can impact a credit score up or down. But the relationship between credit limit and credit score is not mutually exclusive. Other factors such as credit utilization, payment history, other lines of credit, changes in spending patterns, and household income can contribute to an increase or decrease in consumers' credit limits.

The bottom line is that underwriting frames the rules of the game when it comes to issuing credit and setting credit limits. But by better understanding how credit scores influence credit limits and vice versa, you can play the game to your advantage with a more empowered approach to managing your credit health.


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Helpful to 2 out of 2 people

I've got a credit card limit of $1500 and a score 0f 745. I guess I'm an outlier...

Comment by
fiandola

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Helpful to 1 out of 1 people

I have a credit limit on all cards combined of around 5000 dollars and I am in the 702 range according to American Express Credit Secure. On CreditKarma I have a 667 but it's been going up and down a lot. Last month it was 711.

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Comment by
Mike11212

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Helpful to 1 out of 2 people

I too, would like to see these banks fall on their knees! Especially Citi Bank.

I've been with them over 18yrs and had ONE late pymt for the very first time last year. I called to apologize and explain that I was e-paying it and to please note my records. They seemed understand- ing enough at the time, but the following month, they had the nerve to raise my APR from 8 1/2% to 29.9 I was furious and called them several times, to no avail. I even wrote them a letter stating they were "loan sharks". Even the cr cards I'm still on time paying are raising their APR's. All before the new law goes into effect....How conveinent!!

Comment by
thenonnaof3

2 Contributions
1 Person Helped

I want a cc with a high limit... ck score 602....

Comment by
DeronB40

4 Contributions
0 People Helped

 my credit score is also lower with credit karma than with the credit companies when my bank pulls it up....why?

Comment by
thenonnaof3

2 Contributions
1 Person Helped

find out what credit reporting agency your bank is using. Remember you can be using a model that isn't out of 850 so the higher score maybe in line with credit karmas because the reporting agency uses a different scale. If they use a vantage score its out of 990 so your normal 800 score wouldnt be as good in that bracket.

Reply by
emersj

5 Contributions
1 Person Helped

how long does it take for a new credit limit on a card that has gone up show up on the report?I paid off the bill and got a huge increase in my limit.

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Comment by
happycat2010

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If it were me I would be keeping them open and use them periodically. Or pay your monthly bills with them and then pay all of your bills direct to the credit card company.  Keeping them active is important and of course they credit amount could drop, but all in all you have that history still when the cards are open.  I would suggest getting rid of cards that are newer. 

Comment by
Spotted1

2 Contributions
0 People Helped

I am about to payoff 3 of my 8 credit cards.  Do I leave them open in order to keep the history or close them?  I have plenty of other history on the remaining cards along with a home, car and rv loan. 

Comment by
sealover

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I still haven't figured this out. I apply for a new credit card last month. I have a credit score 750 but they only gave me a $600 limit. I cant even do a balance transfer with this limit.

Comment by
smwiggs76

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Debt to income ratio plays a part in credit limits too.  Maybe yours is to high?

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Reply by
Klien

73 Contributions
60 People Helped

I have been approved for an unsecured student credit card for $600 credit, and also for a secured capital one card which I have a choice not to activate the account. I am not sure whether I should make the deposit and keep the secured card as my second card, as I heard a secured card's limit could increase after a few months of use and be upgraded to an unsecured one(though it might take too much longer). Because I am going to keep a really low utilization, $600 limit definitely is not much enough for me. Since I havn't got a credit history yet and I guess no inquires had been recorded, would it be a good idea to keep both cards so that my total credit limit will grow faster and thus my credit rating? Or should I not open the secured one, instead try to apply for another unsecured one later? What would you suggest?

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Comment by
JackieCH

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