Credit limits: What they are and how to increase yours
Getting your first credit card or line of credit can be exciting. Now you have the flexibility in your finances to make large purchases and maybe even manage your cash flow.
But a credit card isn’t a blank check; you can’t just spend as much as you want. Most lenders impose a credit limit based on how much debt they think you can repay.
Here’s a look at credit limits, how to increase one, and what you can do to avoid getting in over your head.
Key Points
- A credit limit is set by a lender to prevent you from accessing more money than they think you can repay.
- Your available credit is the difference between your credit limit and how much credit you’ve used.
- As you establish a history of paying on time, your credit card company may raise your limit automatically, but you can also request an increase.
What is a credit limit?
A credit limit is the amount of money a lender thinks you’ll be able to pay back. Limits are set by credit card companies to keep you from spending more money than you can reasonably repay. For example, if you’re a new credit user, a credit card issuer might decide to give you a limit of $800. You won’t be able to carry more than $800 on that credit card.
Why is my credit limit low?
Whether you’re getting your first credit card or you’re an old hand at the game, you might be surprised to see a lower credit limit than you expect. Credit card issuers generally set your limit after you’ve filled out an application and been approved. Your credit limit is based on other information about your credit history and finances.
- Income. First, the credit issuer looks at your income and determines how much they think you can reasonably pay back. They want to make sure you’ll make payments (with interest), so if you have a lower income, you’re likely to see a lower credit limit.
- Credit history. Creditors also review your credit history. If you have no credit history or a low credit score, they might start you out with a lower limit. They want to see how you handle this lower credit limit before increasing how much you can spend.
- High balances on other loans. If you have a lot of other debt or high balances on other credit cards, a creditor might be nervous about giving you more room to run with your credit. Remember: Credit isn’t your money. The issuer is fronting you the funds with the expectation that you’ll pay it back, with interest. If you have a lot of other debt, a creditor might be worried about getting paid, and for good reason. Credit card interest rates can be sky-high for any cardholder, bordering on predatory lending in some cases.
The good news is that you can ask for a credit increase later. Some credit issuers will even automatically increase your limit down the road.
How to increase your credit limit
Some credit issuers will give you an automatic credit increase. This is especially true if you’re a new credit user and this is your first credit card. After a few months, the issuer might review your account and decide to raise your credit limit. Generally, this happens after you’ve made consistent, on-time payments that keep your overall balance low.
So if you pay off your purchases and keep a low balance, there’s a good chance the issuer will increase your credit limit. But you can also request a credit limit increase. In many cases, you can do this from your account, or via the credit issuer’s mobile app.
Before you ask for that credit limit increase, though, think about whether it makes sense for you. Remember: A higher credit limit could result in more long-term debt. If you aren’t sure you’ll be able to make payments or if you’re worried that you’ll carry a balance for a long time, getting a credit limit increase might not make sense.
The creditor will consider the same factors when deciding whether to give you an increase. The best times to ask are when:
- Your income has increased.
- You’ve paid down other debt.
- Your credit score has improved.
Your credit limit works both ways. A creditor can decrease your limit as well. Usually, this happens if there are concerns about your ability to repay. If you acquire a lot of new debt in a short period, or if you’ve started missing payments or paying late, a creditor might decide to reduce your credit limit so you can’t spend more.
Credit limit vs. available credit
As you learn more about borrowing and credit, you’re likely to see the term “available credit.” This is different from your credit limit.
Available credit is how much space you have left before reaching your limit. For example, let’s say you have a credit card with a limit of $2,000. You use that card to spend $1,200 on a new laptop. Your limit is still $2,000, but now you’ve spent money. Your available credit is what’s left until you reach your limit—$800, in this case.
You can increase your available credit by paying down your credit card balance, which is what you actually owe on your card. In our example, if you make a credit card payment of $600, you’ll reduce your balance to $600 while increasing your available credit to $1,400. Your credit limit remains the same at $2,000.
Credit cards are an example of revolving credit. If you don’t pay off your balance each month, you’ll be charged interest, which is added to your balance and reduces your available credit.
Finally, available credit can also refer to the total amount of credit you have available across all your revolving accounts. For example, if you have a home equity line of credit, a personal line of credit, and three credit cards, your total available credit is how much “room” you have up to your limits on all those accounts.
How your available credit affects your credit score
Your available credit is one of the main factors major scoring models such as FICO use to assess your creditworthiness. Your available credit compared to your credit limit is called your credit utilization. For example, if you have a balance of $1,200 on a credit card with a $2,000 limit, you’re utilizing 60% of your credit limit.
The higher your credit utilization, the lower your credit score is likely to be. So how much credit can you use? Well, you can use as much as you have available. But if you want to keep the negative impacts on your credit score to a minimum, many experts recommend that you keep that ratio to 30% or less.
A higher credit limit can reduce your credit utilization, so having a credit card and using it is one of the fastest ways to improve your credit score.
The bottom line
To avoid a negative effect on your credit score, try to use no more than 30% of your available credit at any one time. But the best practice is always to pay off debt as quickly as possible. If you use a credit card, try to pay off purchases right away, without carrying your balance for an extended period.
Even when you have more available credit, you can keep your options open by building an emergency cash fund. Do your best to keep your balances low. Your credit score and your future self will thank you.