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Underwriting is a complex process used by credit card companies to determine what kind of credit limit they want to give you. Using a bunch of mathematical formulas, testing, and analysis, they figure out what you deserve, but no one is going to tell you how the process works.
Credit limits are important for a number of reasons. Higher credit limits give you more freedom in how you use your account. They may, however, make it easier to overspend and become in debt. Furthermore, how much of your credit limit you use can have an impact on your credit scores. If you’re given a higher limit it means the company trusts you more, and that they expect you to repay the debts. But let’s take a little closer look at some of the important factors.
FICO scores influence whether you may be accepted for credit. A good FICO score can determine whether you obtain mortgage or finance approval, attractive auto insurance rates or even acceptance for a lease.
In this chart using Experian data, you can see the average FICO score has increased significantly over the last decade. While there was a dip in 2013, the average score has consistently increased year on year.
Let's look at how credit limits are set, why they're important, how they affect your credit scores, and what you can do with your credit limits to improve your overall credit health.
What is Your Credit Limit?
First, let’s look at the credit limit itself. This is a set number, according to the credit card company, that you can spend on your credit card.
It seems pretty easy, right? But it’s actually a little more complex, especially when you hit that limit or go over. If you end up going over your limit you could have your card declined, which is embarrassing, but it’s the easiest result.
Otherwise, you could be able to charge the amount and then get charged an over-the-limit fee. It could be up to $25 just for doing it once and if you happen to do it again? It could be as much as $35 the second time.
It’s important that you know, however, that a credit card company can’t charge you over-the-limit fees if you haven’t agreed to have over-the-limit charges allowed. Other consequences come up as a result of going over your credit limit. For one thing, your credit card company may decide to lower your limit.
For another, they may require you to increase your minimum payment because you have to pay additional fees and whatever is over your limit as well as the normal minimum.
The Factors That Affect Your Credit Limit
So, just what is actually being used to figure out your credit limit when you apply for a card or request an increase?
First, the company is going to pull a credit report with your income, debt, payment history and more, to get a better idea of whether you’re financially responsible.
1. Payment History
The first thing is how well you do at making your payments.
If you make late payments a lot or miss payments a lot then you’re less likely to be approved for a credit card or any kind of increase. It’s likely you’re not going to pay that money back.
How long you’ve been making those payments is another important factor, which means if you’re younger and don’t have a lot of payments made, even across multiple cards, you may not get approved.
Credit card companies don’t have enough of the information they want to decide if you’re a good risk.
2. Company Guidelines
If you’ve ever applied for different cards or looked at the information you know that there are different guidelines for different cards.
You might have different types of cards offered, like a rewards card or a secured on or a cashback card. You might have different levels of cards, like a standard, gold or platinum. There might also be different credit limits for those cards. If you have a rewards card you might get a higher maximum limit than if you were to get a low rate card.
The credit reporting bureaus are even saying that credit limits have risen from around $29,176 in 2010 all the way up to $33,371 in 2017, and they’ll probably continue to rise. For rewards cards, you’ll generally get a higher limit if you get a platinum card than if you get a gold card. A basic card might give you only $500, but a secured one will give you however much you want to keep in the account.
You can get increases with these cards quite easily most of the time.
3. Debt-To-Income Ratio
This DTI ratio may have an impact on the credit limit on your credit card – how much money do you have coming in versus how much money you actually owe?
The credit card company wants to make sure that you can pay them back, so if you have a ratio of 35% debt to income you probably have a good chance of getting what you want. That is, a high income offset by high debt payments may result in a lower credit limit than if you spent less money on monthly debt payments.
If you’re at 50% or higher however, you may have a harder time getting approved.
4. Current Credit Limits
What limits have your other credit card companies put on you?
No company wants to be the first one to give you a huge limit, but if someone else trusts you then they are more likely to as well.
5. Who’s Signing
If you have someone else willing to sign with you then the credit companies are going to look at their credit score as well, and use that information to decide whether you should get a certain limit. If you apply jointly with another person, the credit card company will base your credit limit on both of your incomes and credit qualifications.
If their score is higher it might give you a better chance to get a higher credit limit as well, since their score is tied to your spending.
6. Recent Applications
Every time you apply for any type of credit it runs your credit report, and that means you’re going to have more inquiries.
The more of those you have the higher the risk you’re considered and that means you’re more likely to get a lower limit.
Spreading out your applications tends to look better to credit companies.
Okay, so these aren’t actually ‘limitless’ but they are as close as you can get in most cases. T
his type of card is going to give you no definite limit, but there is a floating limit that tends to vary based on how much you normally spend or how much you make or any number of other factors.
For this type of card, you’re usually not given a maximum when you apply. Instead, you’re given a minimum amount that you’re going to get.Your statement will generally let you know what the minimum is and you have a higher amount if you want to spend it.
Of course, you can contact the company themselves and seek out an even higher credit limit, but it’s important to be able to pay it back and to be able to support your request with a good credit report.
What Effect Does a Credit Limit Have on Credit Scores?
Your credit limit is closely related to your credit utilization.
This is due to the fact that credit utilization is the percentage of available credit that you are using, and it is one of the factors that can affect your credit scores. The Consumer Financial Protection Bureau (CFPB) advises keeping credit utilization below 30%.
If a lender decides to decrease your credit limit, then your credit utilization might increase. This means lenders might look at your credit report and deem you a risky lender. If your credit utilization increases, your credit score will usually decrease.
The opposite is also true. If a credit lender increases your limit, you might find that your credit utilization decreases and your credit score report raise. This means you will be considered a less risky lender and might be given lower interest and better options for loans. However, with greater freedom and flexibility comes greater responsibility. Higher credit limits also make it easier to accumulate debt quickly. It's also important to remember that your credit score can be affected by a variety of factors.
Just beware that an increase in your credit score limit might cause you to spend closer to the new limit will could in turn negatively affect your credit score.
This chart created with Experian data shows that those with an average to good credit score have an average credit utilization ratio of the optimum 33%. This ratio drops significantly for those with very good and excellent scores.
At the other end of the scale, the chart shows that those with poor credit scores typically have a very high credit utilization ratio, with an average of 73%. This will be a massive factor in lending decisions for those in this group.
How to Check Your Credit Card Limit?
Are you sure you can afford to make that next big purchase? If you’re not you should check your balance before you risk the over-the-limit fees we talked about earlier.
- Checking Your Balance Online: Online banking is really popular right now and for good reason. You’ll generally get up to the minute information about your charges, (both approved and pending) and about the amount of money you’re able to still spend. Plus you can do balance transfers, pay the bill and check your balance, all from your computer or smartphone.
- Recent Card Statements: If you haven’t made a purchase lately or if your statement is recent enough you could check what it says about your available balance or about your total credit limit. You’ll also be able to find more about your current balance and you can check out the most recent charges. You may have to update this personally to know if you can make a purchase of a certain amount now.
- Your card’s customer service: If you want you can also call the customer service line for your credit card and find out what your current available balance is that way or about your total credit limit.
What Happens If Your Credit Limit Is Exceeded?
A few things could happen if you go over your credit limit. The first possibility is that your card will be declined when you attempt to use it. Also, you may also be charged a fee if you participate in an over-the-limit coverage program. However, that program is optional.
You can check your status by contacting your credit card company. And, if you accidentally opted in, you can change your mind at any time. However, you may still be required to pay any fees that have already been assessed. Additionally, if your balance remains above your limit after opting out, you may be charged additional fees.
Does the Limit Can Go Down?
For those who don’t spend the amount on their card or who tend to go over the limit or even those who don’t make payments, credit card limits can definitely go down. That’s why it’s important to check your credit limit periodically, so you know what you have available.
Why Did Your Credit Limit Change?
Sometimes you might get a notification that your limit increased or decreased automatically by the credit card issuer. If you have had a recent drop in your limit, it might be because you don’t use the credit card very much. If you have been using the credit card too much and then not paying making minimum payments, you might also find that your credit limit decreases.
If you have many late or missed payments, your credit limit may also decrease. Your credit limit will also increase sometimes either automatically or after you have sent in a request. If you received a credit limit increase, it’s probably because you don’t overuse your credit card and you always make your payments on time
When Are You Eligible for a Credit Line Increase?
There are several times when you should request a credit line increase. Graduating from high school and entering the workforce is an excellent time to request a higher credit limit from your issuer. Getting a raise or moving to a new, higher-paying job are also indicators that you may be eligible for more credit.
While each lender has different criteria for granting increases, only long-term cardholders should expect one. Banks will only lend additional funds to customers they have reason to trust, and that trust must be earned over time.
You can request another credit increase as soon as six months after you've been approved for one. If you were denied, you should wait until you can show a pattern of responsible card usage. If you have improved your payment habits or if your credit score has increased for other reasons, your chances will improve.
Should You Apply for an Increase?
Of course, you have to have the focus not to increase the amount that you’re spending just because your available amount went up. You still want to keep around the 30% mark for your credit utilization ratio.
If you’re able to increase the credit card limit but not increase spending then getting an increase can be great for you, letting you spend what you need and still keep your balance at a good level.
Of course, if you’re going to be purchasing something major and you want to be able to put it on a card that could be another great reason to increase your credit card limit, if you’re able.
How to Get A Card Limit Increase?
Credit limit increases are sometimes automatic for long-term customers, but you can request one if you've only been a customer for a few months.
Card companies are known to increase cardholders' credit limits automatically (with no effect on your credit score), especially if you keep your income information up to date and have a good payment history.
However, not everyone will automatically receive a raise. Even if you do receive a higher credit limit, you may not receive the necessary increase. As a result, it may be prudent to request a higher credit limit for yourself.
While it may be tempting to request a significant increase, keep in mind that requesting a large amount increases the likelihood that the issuer will decline your request.
Many card issuers provide an online request form, but others require you to call. When you request a higher credit limit, you must provide this information. If your income has increased since you opened your credit card, your chances of getting a credit limit increase increase.
In addition to your income, you may be asked for your current monthly housing payment and the credit limit you desire. It is determined by the card issuer, as each handles credit line increases differently.
You should receive a decision right away. If your request is approved, your card issuer will notify you of your new credit limit. If it was denied, you'll usually have to wait three to six months before trying again.
The easiest way to check your credit limit is by logging into your credit card account. Usually, it will show on your account page your balance information page. It might also show as an amount you have left to spend.
For example, if your account says you have $600 left on your limit and your balance is $2,400, then you have a credit card limit of $3,000. If you can’t find the information on your account page, you can always find it on the information that was sent to you physically or electronically when you first got the card.
Most credit card companies will let you go over your card limit a certain amount. They will usually alert you by text or email when you have gone over your credit card limit. Many credit card companies will charge you a fee if you go over your limit and you don’t pay back the balance when your next payment is due.
Some credit card companies let you get over credit limit protection. This allows you to make occasional over-the-limit purchases. If you don’t opt for over-credit limit protection, your transaction will be declined by most companies
Lowering your credit limit can actually hurt your credit score. This is because it increases your overall balance to limit ratio. This means you will have a high utilization rate. This makes you look very risky to lenders, and they will be less willing to give you loans or more credit cards in the future.
This will overall hurt your credit score because your debt ratio is rise. If you are having trouble spending too much because your credit limit is so high, try to budget your money more wisely or tell yourself you will only spend a certain amount each month instead of reducing your credit card limit.
The amount you send up to your credit limit will reset every month, but not your actual credit limit. For example, if your statement balance was $2,000 and make a credit card payment of $400, then your new balance is $1,600. If your credit limit is $3,000, then you will have $1,400 to spend according to the payment you made.
Your credit limit will not actually increase though unless you request a raise. The limit will always stay the same from month to month.
There are several ways you can increase a higher credit limit. You have to go through your lender directly, which usually means contacting your credit card company. Most of the time, you can make a request online through your account portal.
You can also call the card issuer and ask for a credit limit increase. Sometimes a credit card company will also send offers for you to raise your credit limit if you have been making all your payments on time. If they send you an offer to increase the limit, it will usually come with instructions on how to take the offer and request the limit increase.
This depends on what you want to use your credit card for. $10,000 might not be enough to make large purchases, but it’s still considered a good credit limit. $10,000 is considered on the high end of credit card limits.
However, some credit cards, such as reward cards or cards from airline companies might offer higher credit limits. The credit limit that you’re offered will depend on your credit score and other factors on your credit report.