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How Your Credit Limit Is Set (And Why It Matters)

credit limit

Your credit limit might not be something you think much about, but it can have a big affect on your finances and credit. From the basics to learning how to increase credit card limits, here’s what you need to know.

What is a credit limit?

A credit limit is the highest amount a creditor has approved you to borrow on a line of revolving credit, like a credit card.

Usually, the lender will determine your credit limit when you open a credit card. A financier might also refactor a credit card limit while the credit line is open. If the borrower has become more creditworthy, a lender will often increase the credit limit.

Why your credit limit matters

So why is your credit limit important? It’s the total limit you can borrow, which can affect how you use your credit card.

Some people might need a higher spending limit because they charge quite a lot to their credit cards, or they might rely on personal lines of credit to bridge the gaps between fluctuating paychecks.

A lower limit can be a wise cap on borrowing. It prevents a borrower from racking up a credit balance that’s too high for the borrower to pay back. It also protects the lender from paying out money and losing it to a borrower who can’t repay it.

Your credit limit and credit utilization ratio

Your credit limit is also important because it affects your credit score. Credit utilization is a number that measures how much you have borrowed (your credit card balance) to how much you could borrow (your credit card limit).

This plays a big role in how your credit score is calculated. Typically, lenders want to see a credit utilization of 30 percent or less.

With a higher credit limit, you’ll have an easier time keeping your balances under that benchmark. This will help improve your credit score and make you a more qualified borrower in the eyes of lenders.

How lenders set your credit limit

Lenders look at several factors to set a credit limit. Each lender follows guidelines and limits for their own products, as well as industry standards. A lender will consider a borrower’s credit history and financial situation to determine an appropriate credit card limit.

Credit limits that are low-risk

Lenders are interested in balancing returns and risk. The higher an account holder’s credit card limit, the more they can borrow — and the more money the lender will lose if the borrower defaults.

To limit their risks, creditors often turn to industry standards to see how other lenders are handling credit limits. They might even look at your credit history and see what credit card limits other lenders have set for you specifically.

Lenders will first follow their own internal guidelines for their credit cards or lines of credit when setting credit limits. Some lenders are more willing to take on the risk of setting higher credit card limits. Others are more risk-averse and have lower borrowing limits for all its customers.

The type of credit card you choose

The credit limit you get on a card is often a reflection of the credit card you have and how lenders expect it to be used.

Cards designed for big spenders will have higher spending limits, for example. A credit card meant for building credit, on the other hand, will usually have a lower credit limit.

A credit card issuer will also often have built-in “tiers” or preset rules for credit card limits.

When Chase, for example, processes applications for its Freedom card, it can approve borrowers for either a Platinum or Signature Freedom card. These each have different spending limit guidelines; the Platinum card has a credit limit of at least $500, while the Signature starts credit limits at $5,000.

Your credit history

Whether you get approved for a credit card will also depend on your credit history and score. These can also influence the credit limit you’re offered.

A lender will be interested in your credit payment history, which can usually be found on your credit reports. They will want to see that you’ve responsibly made payments on-time — the longer your history of doing so, the better.

Many lenders will also consider your credit score when deciding how to set your credit limit. The higher your score, the better.

Your income and other financial factors

In addition to your history of paying off debts, lenders will also look at your current financial situation.

They want to make sure that your income is high enough, and your debts and other financial expenses are low. This will show that you can reasonably afford to pay down a higher balance if you have a higher credit limit.

How to increase credit limits on your accounts

A higher credit card limit is important to your credit and spending habits. Even if you initially get a lower limit, this is often flexible and can be raised. If you want to increase your credit limit on a credit card, here’s how to do it.

Use your credit responsibly for an automatic credit limit increase

Often, a credit card company will actually offer you a higher credit limit once you’re an established customer.

They monitor for responsible borrowing behavior like not charging too much, paying off balances, and making on-time payments. A credit card company will usually need to see these habits over time — at least three months, but typically over six months.

If you keep up responsible borrowing behavior for that period, many credit card companies will automatically increase your credit card limit. You’ll be notified that it’s gone up.

Your higher credit limit should also be reflected on your monthly statements, online account login, and your credit reports.

Ask your lender to increase a credit limit

Maybe you’ve kept your account in good standing for six months but your credit card limit hasn’t gone up. You may have luck if you simply ask your lender to increase your credit limit.

Call customer service and ask if a representative can process your request to increase credit limit by phone. Credit card companies may also have applications to increase your spending limit on their site.

You might have to resubmit your financial information, including your income and other debt information. This can work in your favor if you’ve gotten a raise or paid down other debts since opening the account.

Work on improving your credit

If your request to increase credit limit is denied, don’t give up. There are certain steps that will help almost anyone improve their credit and boost their chances of getting a higher borrowing limit.

In a guide for credit line increases, Capital One suggests that its customers make on-time payments each month. It will also help to make higher payments on your account to pay off balances faster, rather than simply paying the minimum.

You’ll also need to make sure that you’re keeping up with other debts as well. If you miss a student loan payment, for instance, that could be a sign to a credit card company that you’re stretched too thin.

Lastly, you can work to increase your income. If you switch to a higher-paying position or get a raise, you can update your credit card company on this development. Your new income information could help you qualify for an increased credit limit.

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Published in Credit, Credit Card Debt, Credit Cards, Credit Score, Debt,