Credit limit refers to the maximum amount of credit a lender
extends to a borrower. All credit cards and lines of credit
have a credit limit. The credit limit will vary among
individual borrowers based on personal information such as
credit score, monthly income, and
credit history. Credit limits affect a borrower's credit score and
ability to get future credit.
Lenders tend to give higher credit limits to people with
good credit, while people with a lower credit score or
monthly income tend to be considered credit risks and get
smaller credit limits.
Why Does a Credit Limit Matter?
A large part of any credit score is determined by the amount
of credit you use. Your cards' balances and limits are
calculated to consider your score. A good credit score will
allow you to receive financing on a car, a home, or a
personal loan.
Keeping your credit card balance low is always a good idea
when managing your credit limit. Paying your balance in full
every month is the best practice. If you can't, pay what you
can afford over the minimum payment to keep moving in the
right direction.
How Does Credit Limit Work?
The lenders determine your credit limit when you apply for a
credit card or
revolving line of credit. A good credit score and monthly income can mean a higher
credit limit, while a bad credit score or unsteady income
can mean higher
interest rates
and a low credit limit. So what do lenders want to see when
they are analyzing your application? Lenders want to know a
person with substantial monthly income, a good credit score,
and a low debt-to-income ratio. If you have a low income,
lenders may view you as a credit risk; they would either
reject your application, charge you a higher interest rate,
or assign a low credit limit.
You won't know your credit limit until you have submitted
the application form and are accepted for the credit card.
If you are unsatisfied with the credit limit assigned, you
can ask your lender for a credit limit increase, but it must
be a reasonable request depending on your income and
credit score. Additionally, if you already have a credit card or line
of credit and have been consistent with the monthly
payments, you may be offered a pre-approved credit limit
increase by your lender.
Credit Limit Examples
A person with a decent credit score and an average income
may get approved for a credit card with a credit limit of
$4,000. A person with a higher monthly income and a better
credit score can get a credit limit of $20,000 or more. How
you use the money and whether you exceed your credit limit
will make or break your score. How much you use on a
credit card or line of credit
will directly impact your credit utilization ratio.
How is Credit Limit Determined?
Lenders set credit limits, and several factors affect their
decision. Companies could examine your
credit reports, credit scores, and credit application. Here are a few
questions lenders may ask when considering your application:
-
Your income: Will your income cover your
monthly bill?
-
Your payment history: Do you pay your
bills on time? Have you had a debt sent to collections or
filed for bankruptcy?
-
Your debt: What's the total amount you
owe? How much of your available credit are you using?
-
Your account history: have you recently
applied for an abundance of new credit? How long have you
had your current accounts?
-
Your current accounts: How many open
accounts do you have, and what types are they?
Credit limits don't stay the same during the
loan term. If you are unsatisfied with your credit limit, you can
ask for a credit increase. In some cases, your lender could
decide on its own to increase or decrease your credit limit
depending on how you handle your credit card or
line of credit. If you make the payments on time consistently and have
been using the amount mindfully, your lender could offer you
a raise in your credit limit. Similarly, your lender could
decrease your credit limit if you are late on payments.
Why Your Credit Limit Is Low
Your credit balances are above 30%
You have a high debt level
You have a history of late payments
You have a low income
You have a history of new credit
What is a Good Credit Limit?
While different lenders have different ranges of credit
limits,
Recent data from Experian
suggests that the average American has access to $27,304
with all of their credit cards combined.
There's no specific percentage that is considered a
reasonable credit limit. A credit limit should be suitable
for you; someone may not be happy with a credit limit of
$10,000, while another person may find that limit
reasonable. First-time credit card users may also get
assigned a smaller credit limit by lenders to gauge if the
borrower can make timely repayments and their spending
habits.
Average Credit Card Limits by Generation
Generation
|
2021
|
Generation Z (18-24)
|
$9,857
|
Millennials (25-40)
|
$22,136
|
Generation X (41-56)
|
$33,694
|
Baby boomers (57-75)
|
$38,898
|
Silent generation (76+)
|
$31,937
|
How Much of My Credit Limit Should I Use?
Borrowers are always advised not to use more than 30% of
their credit limit. That 30% mark is considered an ideal
credit utilization, and using more than that will impact
your credit score significantly. If you have used more than
30% in any month, then make sure you pay it back on time to
keep your credit score undamaged.
If your credit utilization exceeds the 30% mark, paying down
your credit balance multiple times a month can also help you
recover your credit score.
Credit Limit vs. Available Credit
The difference between the credit limit and available credit
is the balance on the credit card or line of credit.
The credit limit is the total amount available on your card,
including any amount you may have already borrowed.
Available credit is the difference between your account
balance and your credit limit, which means available credit
is the amount left in your credit account. Once you have
reached the credit limit, you will have maxed out your
credit card, and your available credit will be zero.
What Happens if You Go Over Your Credit Limit?
A few things can happen if you go over your credit limit.
Your card will be declined when you use it. You'll also be
charged a fee if you signed up for an over-the-limit
coverage program. If you sign up for that program, you could
be charged a fee every billing cycle if you exceed the
credit limit. Your credit card company must inform you how
much those fees will be.
You can sign in online or contact your credit card company
to check your status. If you signed up by mistake, you could
change your preference anytime. But, you'll need to pay any
fees that you were already charged. If your balance stays
above the limit after opting out, you might also be charged
additional fees.
Conclusion
Credit limits are not constant; your credit limit may get
bumped up or down depending on how you handle a credit card.
If you are good at payments and have a decent credit
utilization ratio, your lender may offer you a raise in your
credit limit. These raises can be pre-approved or may
require you to fit some criteria to be eligible for the
increase. So, it's essential to use your credit wisely and
be mindful about not overspending or maxing out your card
too frequently. We hope this helps you understand the
nuances of the credit limit.