How your credit limit is determined

1
G-Stock Studio/Shutterstock.com

At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here’s an explanation for

The content on this page is accurate as of the posting date; however, some of the offers mentioned may have expired.

How do credit card issuers decide what credit limit to offer you when you apply for a new credit card? It all depends on how the credit card issuer calculates credit limits—and how your credit history affects the calculation.

Some credit card issuers have preset credit limits that are issued to all new cardholders. Other credit issuers use information from your credit report to calculate your credit limit. People with better credit scores are likely to get higher credit limits since they are viewed as less of a potential credit risk. After all, a high credit score is correlated with a history of on-time payments and the ability to pay off your debts.

What does all of this mean for you? Let’s take a close look at how credit limits work and how credit card issuers calculate your credit card limit. We’ll also offer advice on how to increase your credit limit, just in case you want that extra spending power and the associated credit score boost.

What is a credit card limit?

A credit card limit is the total amount of money you can charge to a credit card. If your credit card has a limit of $5,000, for example, it means you can carry a balance of up to $5,000 on your credit card. Your credit card limit includes both new purchases and balance transfers—as well as any other transactions that draw against your line of credit, such as cash advances. Even your credit card annual fee is charged against your total credit limit.

The closer your balance gets to your total credit limit, the worse it is for your credit score. The amount of available credit you are currently using accounts for 30 percent of your FICO credit score—and maxing out your credit cards can have a serious negative effect on your credit score.

What happens if you try to spend over your credit limit? In most cases, your transaction will be declined. Some credit card issuers used to allow overlimit transactions in exchange for high overlimit fees, but this practice has largely been dropped.

The average credit card limit, according to 2020 data from Experian, is roughly $31,015 per American. This number represents the total credit Americans can access across all of their credit card accounts, not their per-card limit. In general, credit limits tend to run around $2,000 to $10,000 per card—although many credit cards for people with bad credit offer lower credit limits in exchange for giving you the opportunity to rebuild your credit score.

How is your credit limit determined?

Your credit limit is calculated in one of three ways. In some cases, you’re offered a predetermined credit limit. In other cases, your credit limit is based on your credit history and credit score. In a few cases, a credit card issuer will do a more in-depth analysis of your credit history, considering any reasons why you might be a potential credit risk and calculating the credit limits you’re currently receiving on your other cards.

The predetermined credit limit

Some issuers like to keep it simple, offering credit cards with predetermined credit limits. For example, a run-of-the-mill entry-level card would come with a $500 limit, a card with more benefits would get a $2,000 limit and a premium card would come with a $5,000 limit.

A predetermined credit limit is offered to everyone who qualifies for the card, so you can choose the credit card with the credit limit that works best for you. But remember, just because you apply for the card with the $5,000 credit limit doesn’t mean you’ll be approved. Your credit score and income level must meet the card’s requirements, so keep that in mind before you apply.

“It’s not a highly personalized decision,” says Eric Lindeen, senior marketing consultant at CRM Northwest Inc.  “If the limit seems oddly huge or small, it’s not a reflection of you as a consumer. You just applied for the wrong card.”

What happens if you aren’t satisfied with your credit card’s predetermined credit limit? Lindeen says that, in some cases, you can ask the card issuer to hike the limit. Some issuers allow some wiggle room but don’t expect an increase of more than 10 percent to 20 percent, he explains.

The credit-based limit

Other credit card companies turn to your credit history to help determine your card’s limit. The process is similar to how issuers figure out the interest rate on your credit card, says Bill McCracken, former CEO of Synergistics Research Corp., a market research firm that focuses on financial institutions.

For example, a specific credit card offer may come with a credit limit between $1,000 and $5,000. Those with higher credit scores will get the $5,000 credit limit, but those who fall on the lower end of the qualifying credit range will get $1,000.

“Sometimes, a lender will deviate from the formula if you’re an existing customer,” McCracken says. “But usually, that’s the scoring they stick with.”

The customized credit limit

Then there are lenders who take pains to minimize risk by taking into account a host of variables to determine your credit limit.

Lindeen says some issuers create a grid system and compare several different types of scores, such as a credit score and a bankruptcy score, to figure out a credit limit. Others consider your income or debt-to-income ratio in generating a credit limit. Some issuers may even take into account the limits on your other credit cards, which can be found on your credit reports, says John Ulzheimer, a nationally recognized credit expert formerly of FICO and Equifax.

By considering a range of factors, these lenders can better calculate the risk in offering a certain credit limit. That helps creditors balance the risk in their overall portfolios, Lindeen says.

How to increase your credit limit

Increasing your credit limit provides a lot of advantages. Not only do you get more purchasing power, but you also have the opportunity to increase your credit score by lowering your credit utilization ratio (that is, the amount of debt you’re carrying vs. your total credit limit).

Plus, since some lenders use your current credit card limits in their credit limit calculations, having higher credit limits on your current credit cards could increase the credit limits you receive on future card offers.

There are two ways to increase your credit limit, so let’s look at each of your options in detail.

Wait for your credit card issuer to offer a higher credit limit

If you practice good credit habits, your credit card issuer may offer you a higher credit limit. “After you’ve had the card for some time, issuers are likely to adjust your limits based on your usage patterns,” Ulzheimer says.

These adjustments could raise your credit limit—but they could also lower it, depending on the way you’ve been using your credit cards. Credit card issuers systematically review accounts and pull credit reports on cardholders to evaluate their current credit behavior and potential credit risk. Issuers may do this annually, or a late payment on a card could trigger a review, McCracken explains.

Request a higher credit limit

If you don’t want to wait for your credit card issuer to offer you a higher credit limit, you can always request one yourself. Many credit card issuers let you request credit limit increases through your online account or through the issuer’s mobile app. Otherwise, consumers can call their issuers themselves and ask for an increase.

When you request a higher credit limit, make sure your credit card issuer knows about any recent changes to your financial situation that might affect their decision, such as a higher annual income or a recently improved credit score.

If you have a track record of on-time payments and low balances, your credit card issuer will likely give you the increase as a “good-faith gesture,” Lindeen says. But don’t bother calling if you’ve been late on payments — and don’t request a higher credit limit if your current credit limit is maxed out.

The bottom line

How is your credit card limit determined? Although some credit card issuers offer predetermined credit limits to every cardholder who applies, other credit issuers use a combination of factors to determine your credit limit, including your credit history and credit score.

Want to increase your credit limit? You can often request a higher credit limit by filling out an online form or by calling your credit card’s customer service department. You can also practice good credit habits and wait for your issuer to offer you a higher line of credit.

Want a card that starts out with a high credit limit? Check out Bankrate’s list of the best high-limit credit cards.