Credit Limit Definition – How to Get a Higher Credit Limit?

Most people have a credit card limit on their cards, but not everyone knows what it is or how it’s determined. These limits are a very important part of your relationship with your credit card company, and therefore it’s essential you understand how they work.   

Credit limit by definition is the maximum amount you can charge on your credit card at any given time. If you exceed this limit, you could get hit with fees or even see higher interest rates on your account.  

This maximum is determined by your credit score, income, and other factors. The higher your credit score, the higher your credit limit will be.  

Income is another factor that determines your credit limit. If you have a high income, you’re more likely to be approved for high credit limit cards. This is because lenders see you as less of a risk. Other factors that determine your credit limit include your debt-to-income ratio and your payment history.   

What Exactly Is a Credit Limit?

The credit limit is the maximum amount of credit you are approved for. For example, if your credit limit is $5,000, then that’s how much money you can borrow from a bank or credit card company when making purchases with a particular card or set of cards. And if you were wondering can you go over your credit limit, the answer is yes.  

If your balance goes above that limit and you don’t pay it off within an agreed-upon period of time (typically two weeks), then your creditor will charge interest on whatever amount remains after that period expires.  

When you obtain a credit card, you are assigned a credit limit. This is, of course, if you do not choose cards like American Express Gold or Mastercard Black Card or some other type that are actually no spending limit credit cards.  

Your credit limit is determined by your creditworthiness, which is based on your credit history, income, and other factors.  

If you have a good credit history and a high income, you will likely be assigned a higher credit limit than someone with a lower income or poor credit history.   

If you need any help staying within your limit, there are several ways to do so:  

• Monitor your spending. Keep track of how much you’re spending each month so that you don’t exceed your limit.  

• Request a lower limit. If you find that you’re consistently close to or exceeding your credit limit, you can request a lower limit from your issuer. This will help prevent you from accumulating too much debt. 

• Pay off your balance. Paying off your balance in full each month will help keep you within your limits and avoid interest charges.  

How Is a Credit Limit Determined?

When you apply for a credit card, the issuer will consider several factors to determine your credit limit. The amount will be based on your income, assets, and credit history. If you apply for multiple loans simultaneously, lenders may not know how much to lend you until they have reviewed your credit history.  

As we already mentioned, if you have a good credit score, strong history of making payments on time, and good income, you’re more likely to be approved for a higher credit limit. On the other hand, if you have a low credit score or a history of late payments, the lender will see you as a less credit-worthy borrower and therefore give you a lower credit limit.   

Your debts also play an important role in determining your limit. If you have other debts, such as student loans or a mortgage, the issuer may give you a lower credit limit so that your total debt doesn’t exceed 30% of your income.   

Many people strive to have as high of a credit limit as possible. This is because a higher limit can help improve your credit score by lowering your credit utilization ratio (the amount of debt you have compared to your total available credit). It can also give you some financial flexibility in case of an emergency.  

If you are wondering how to get a higher credit limit, you can generally get it by calling your card issuer and submitting an official request.  

The average credit limit for Americans is anywhere from around $8,000 (for the age group of 18 to 22) to about $40,000 (for the age group of 53 to 73 years). Although your personal limit will be based on your personal scores and income, of course.  

Keep in mind that your credit limit is not necessarily the same as the amount of money you have available to spend each month. Your spending limit is determined by your income and expenses, whereas your credit limit is the maximum amount you’re allowed to spend on your credit card in a given period of time.  

How Does Your Credit Limit Affect Your Credit Score?

Your credit limit affects your credit score in two main ways:  

• The amount of debt you have relative to your credit limit. This is called your credit utilization ratio, and it accounts for 30% of your FICO® Score. A high credit utilization ratio can hurt your score because it sends signals to lenders that you’re using a large amount of your available credit, which can be interpreted as financial instability. To keep your score healthy, aim to keep your credit utilization below 30%.  

• Your payment history. If you make late payments or miss payments entirely, this will damage your score. The same goes if you continuously go over the set limit on your card. Therefore, it’s important to always make at least the minimum payment on time, even if it’s just the really small amount due. But also, always keep track of your spending so you are sure you’ll not go overboard.  

As a general rule, people think- the higher the limit on an account, the better. But remember that this isn’t always true. If someone has no limits on their accounts and have never used them before (or haven’t been using them for a while), then they might not be building enough good history for those accounts. All of these actions can further lower your scores.  

Credit Limit vs. Available Credit: What’s the Difference?

When you use a credit card, you are borrowing money from the credit card issuer. And the maximum amount you can spend in a day, month, or billing cycle represents your limit. It’s important to understand that just because you have a high credit limit, it doesn’t mean you should spend up to that limit. In fact, maxing out your credit card can hurt your credit score.  

The credit limit is a fixed amount that can be used as you please, on the other hand, available credit is a variable value that changes with each purchase. Think of it this way- your credit limit is like your salary, while your available balance represents how much you have left to spend on expenses before hitting your monthly budget cap.  

Your available credit can also be defined as the difference between your current balance and your credit limit. To give you another example, if you have a $1,000 credit limit and a current balance of $500, you have a $500 available credit.   

To be sure you are not going overboard on your credit utilization ratio, we recommend you keep track of your available credit at all times.  

How to Increase Your Credit Limit?

Now that you have a good idea of what a credit limit is, let’s answer the next question- How can you increase your credit limit?  

We already mentioned that you can just go ahead and request the limit increase. Your creditor will likely consider factors like your payment history and current balance before making a decision. But there are other methods as well.  

You can apply for a new credit card with a higher credit limit. If you have good credit, you may be able to qualify for a much better offer with a significantly higher limit than the current one you may have. You can also choose to apply for a new line of credit with another financial institution if you like their offers better.   

The next option could be asking for no limit at all. Although this may seem impossible, some issuers do grant their customers unlimited borrowing power as long as they demonstrate adequate income levels and pay off their balance every month without fail.  

Additionally, you can also use a balance transfer to move debt from another card onto one with a higher limit. This will help you free up available credit on the lower-limit card so that you can use it elsewhere. Just be sure to watch out for balance transfer fees when considering this option.  

Lastly, you can use a secured credit card to help build up your credit history and improve your chances of getting approved for a higher unsecured credit limit in the future. A secured card requires that you put down a deposit that will serve as your collateral in case you default on the card payments.  

What Happens If You Exceed Your Credit Limit?

If you exceed your credit limit, the consequences can be serious. Some of the most likely consequences include:  

• A fee is charged to your account by your credit card issuer. The amount of this fee varies widely based on where you are and what type of card you have.  

• Your credit limit is being reduced or removed entirely. This can be particularly problematic if it happens on an already-used card with a large balance.  

• Being unable to use your card until you pay down enough of your balance so that it falls under your current limit (if that’s possible). If not, you’ll need to wait until the next billing cycle before using it again. Interest charges from any purchases made over and above what was available on your card at the time they were made will be a lot higher than typical fees on your card.   

• Your credit card issuer may also report the over-limit fee to the credit bureaus, which could negatively impact your credit score.   

If you’re having any trouble with staying within your set limit, contact your card issuer to discuss raising your limit or changing your account terms.  

Bottom Line

The credit limit is one of the most important aspects of credit cards. Your creditworthiness helps lenders determine whether you’re a responsible borrower or not and how much they should set your limits for. If you exceed the limit, there may be consequences like higher interest rates or even being declined. Given the importance of this number, it’s important to know how it works and keep track of your spending habits so that they don’t get out of hand! Don’t get carried away because there are many cons to the credit limit you will need to consider before getting yourself any credit card.   

This is an important topic, so be sure to talk to the financial advisor to get any help, if you need it.