What Is a Credit Limit and Why Does It Matter?

Credit card companies extend their card members a line of credit with a built-in limit – the maximum amount of money you can owe to the card issuer at any time, whether you use it up in a year, a month, or an hour. It’s always listed on your monthly statement and could range from a few hundred to tens of thousands of dollars.

There is a correlation between higher credit scores and credit utilization rates. According to experts, using too much available credit can put your credit score at risk of damage. One of the major credit bureaus reported the following average credit usage for people who fall into the following FICO score ranges:²

As you can see, people with lower credit scores tend to be the ones using the most available credit.

Whatever your credit limit, experts suggest that you keep your credit card balance well below it. Your credit utilization ratio – what you owe on a card divided by the credit limit – should be under 30%, they say, because higher ratios could lower your credit score. For more information, read “What Affects Your Credit Score.” 

As a practical matter, you may hit your limit but going over it is rare. The Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (CARD Act) requires credit card companies to ask card members to opt in to the ability to make overlimit transactions in return for overlimit fees, or the company cannot charge them.³ Instead, many companies decline overlimit transactions.

However, going over your limit is likely to cause your minimum payment to increase. And although some card issuers might close accounts in extreme cases, the biggest impact of maxing out could be damage to your credit score.⁴ Experts say you can talk to your credit card company if you make a credit limit mistake. If you act quickly, you may be able to avoid any record of the episode with credit reporting agencies by paying off the excess balance before your card’s billing date.⁵

It’s a good idea to find out how your card issuer handles over-the-limit transactions by reviewing your credit card agreement. To minimize credit limit issues, you may be able to set text alerts for when your card balance gets close to your limit, or perhaps for when your balance goes over the recommended credit utilization ratio of 30%.

Credit card companies typically review your personal financial profile before setting your credit limit. Important factors can include your credit score, income, payment history, loans outstanding, and the limits on other cards you might have. Over time, a credit card company might offer to raise, or decide to lower, your limit, depending on how well you’ve been managing your credit card. Or, it might automatically raise the limit and simply inform you after the fact. You can also request a higher limit. For more information, read “How to Increase Your Credit Limit.”

Credit card companies may reduce your credit limit if they believe you have a high enough risk of not paying your total debt obligations in the near term. If a credit card company does reduce your limit, it is required to notify you in writing along with the reasons why. You may have the option to appeal a reduction, so it makes sense to give the card company a call if you want your credit limit restored.