What is a credit limit?

Summary

• A credit limit is the maximum amount you may spend on a credit card.
• Your credit limit depends on factors like your credit score, income, and current debt.
• You may request a credit limit increase with a card provider by phone, mail, or online.

When you get a credit card, the card comes with a credit limit. This number is the maximum amount of money you may spend with the card before you have to start paying it back. Let’s take a closer look at how credit limits are determined and why they’re important to understand.

How credit limits work

A credit limit is the most you may borrow with a card before you have to pay the money back. Most credit cards are revolving, meaning once you repay what you borrow, you’ll have access to that amount again.

What is a credit limit vs. available credit?

After you spend money with your credit card, you may see an “available credit” number. This is the remaining amount you may use from your credit limit. Basically, it's your credit limit minus what you’ve already spent during the billing cycle.

For example, let’s say you have a $5,000 credit limit, and you’ve spent $500 this month. Your available credit is $5,000 minus $500, or $4,500. If you repay the $500, you’ll have access to the full $5,000 again.

What happens if you exceed your credit limit?

Exceeding your credit limit may trigger several penalties, depending on the card provider. Some of these penalties may include:¹

• Penalty fees
• Being charged a higher penalty interest rate
• Declined transactions
• Higher minimum payments
• Lower credit score

You typically have to opt in for over-limit charges, which could protect you from fees, but result in declined transactions. If you do opt in, exceeding your credit limit multiple times may have serious consequences, including fees, account closure, and a significant negative impact on your credit score.

How credit limits are determined

Like your credit score, a credit limit reflects how risky lenders believe it is to lend money to you. Each lender has its own underwriting criteria for determining a borrower’s credit limit. Some of the most common factors to consider include:

• Credit score
• Credit history
• Income
• Debt-to-income (DTI) ratio

Strong creditworthiness, higher income, and lower existing debt typically result in a higher credit limit.

What’s a good credit limit?

A “good” credit limit depends on the person. A very high credit limit may not be a good thing if you struggle with overspending. A low one may make it difficult to use a credit card how you’d like. The right credit limit is an amount that allows you to cover essential expenses and repay the statement balance by the payment due date. That way, you may earn rewards and build your credit while avoiding interest charges or penalties.

Can you increase your credit limit?

You may increase your credit limit in one of two ways:²

1. Request an increase from your card provider online, through the provider’s mobile app, or over the phone. You may need to provide updated income and housing expense information.
2. Update your income with the card provider and you may receive an automatic increase.

In either case, the card provider reviews your updated financial information and decides whether or not to approve an increase, and by how much.

How credit limits play a part in your credit score

Your credit score directly impacts your credit limit, but your credit limit may also have an indirect impact on your credit score. That’s because your credit utilization ratio is an important factor in determining your score. Your credit utilization ratio is the amount of credit you’re using compared to your available credit.

For example, if you have a current balance of $1,000 and a credit limit of $5,000, your credit utilization ratio is $1,000 divided by $5,000, or 20%. A lower credit utilization may help you build credit over time. Therefore, a higher credit limit may play a role in improving your credit score, as you could spend more with less impact on your credit utilization.

Know your limit

It’s important to know your credit limit so you know how much you may spend on a credit card without penalties or other negative consequences. Your credit limit also has an indirect impact on your credit score, as a higher limit gives you more flexibility with your credit utilization ratio. You may request a credit limit increase from your card provider when your credit score improves, or if you start earning more money.