What Is a Credit Limit and What Determines My Limit?

How Is Your Credit Limit Determined?

Creditors want to offer you a high enough credit limit that you'll be able to use the card or credit line freely, but not so high that you could take on debt you can't afford to repay. To help them determine the credit limit on a new or existing account, creditors will look at a variety of factors. These may include:

• Your current income, debts and your debt-to-income ratio (DTI)
• Your credit history and score
• Your history with the creditor
• The current economic environment and the creditor's business goals

Your income is one thing but, as you can see, creditors are also interested in how it compares to existing debt obligations including other loans and credit cards you already have. Creditors use DTI to help determine whether you'll be able to easily make minimum payments on all your accounts if you take on additional debt. After all, even if you make a six-figure salary, you may not have room in your budget to pay off a credit card balance if most of your income goes to paying your mortgage.

Additionally, credit card issuers consider how much credit they're already extending to you across all your accounts. As a result, your application for a new credit card might be denied because you're maxed out on the cards you already have.

Your credit scores are another factor creditors look at when deciding whether to approve or deny you credit and the credit limit you receive. They also affect your interest rate.

How Can Your Credit Limit Impact Credit Scores?

The credit limit on your revolving accounts can impact your credit scores because credit limits are half of the credit utilization ratio equation—with the other half being your balance.

Your utilization ratio is the second most important factor in your credit scores, and is calculated on individual revolving accounts as well as on an overall basis. In either case, lower utilization ratios are usually better for your scores. In fact, consumers with excellent credit tend to have very low credit utilization, while those with lower scores tend to have high credit utilization.

To find the utilization rate of an account, review the balance listed for the account on your credit report and divide what you find by the account's credit limit. For example, a credit card that has a $1,000 balance and $4,000 credit limit has a 25% utilization ratio.

Your utilization ratio can also be especially important because most credit scores only look at your current utilization ratio, making it one of the few major scoring factors you can quickly change. When your balance stays the same, a credit limit decrease leads to a higher utilization rate. However, paying down your balance or getting a credit limit increase leads to a lower utilization rate.

Why Your Credit Limit Might Have Changed

While your account is assigned a credit limit when you open it, the creditor can choose to increase or decrease in the future. There are different reasons why a creditor might decide to change your credit limit.

For example, the company may lower your credit limit if:

• Your credit score drops
• You miss payments
• You take on more debt (including debts from other creditors)
• You infrequently use the account
• Your buying behavior changes

On the other hand, creditors may increase your credit limit when:

• Your credit score improves
• Your income increases (and you report the increase)
• You have a good history of paying your bills on time
• You request a credit limit increase

Creditors might also change credit limits due to factors that are outside your control, such as when economic conditions are rough.

And, some actions can be interpreted in different ways depending on the circumstances. For example, someone who carries credit card debt might see their credit limits lowered if the creditor thinks they're at risk of missing a payment. Or, the creditor may increase their credit limit if they think the person wants or needs a higher limit and can afford to take on more debt.

What Happens When You Go Over Your Credit Limit?

In the past, credit card issuers may have let you go over your credit limit and charged an over-limit fee for doing so. However, the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 restricted the use of over-limit fees. Today, if there is a fee, you'll first have to opt in.

If you haven't opted in, the creditor may decline any transactions that would lead your balance to go over your limit. Or, your card issuer may allow you to go over the limit on a case-by-case basis without charging you a fee. When you're allowed to go over your credit limit, you may have to repay the over-limit amount right away, or repay it plus your minimum payment with your next bill.

As you'll be using all—and then some—of your credit limit, going over your limit can also lead to a high utilization rate and hurt your credit scores. If you want to avoid this, you could pay down your balance before the end of your statement period so your card issuer will report the lower balance to the credit bureaus.

Check Your Credit Limits and Utilization for Free

Keeping track of all your credit limits can be difficult if you have multiple credit cards and lines of credit. However, you can check your Experian credit report for free through AnnualCreditReport.com or through Experian directly. You'll then be able to see a list of all your accounts and their most recently reported balances and credit limits. Experian's service also automatically calculates your utilization rate for each account and your overall utilization rate. Lowering your credit utilization and potentially lifting your scores can help you secure lower rates on loans and credit cards, which can open the door to new financial possibilities.