What Is a Credit Limit and Why Does It Matter?

Credit card companies may extend their card members a line of credit with a credit limit. This may be the maximum amount of money you can borrow up to at any time. It may be listed on your monthly statement and could range from a few hundred to tens of thousands of dollars.

Credit card issuers may determine your credit limit after you apply for a credit card and may base their decision on factors including your credit score, income, and debt-to-income ratio. It can be important to note that credit limits may not stay the same forever. They can fluctuate as lenders adjust them. You can request a credit limit yourself as well.

Credit limit and available credit sound similar, but they’re two separate things. Your credit limit may refer to your card’s total borrowing capacity, while available credit can reflect how much of that capacity is still available to use.

• Credit Limit

Your credit limit may be the maximum amount of money that you can charge on a credit card.

• Available Credit

Available credit may be the amount of credit you have left to use after accounting for any current balances. It can be calculated by subtracting your current balance from your credit limit. For instance, if your credit limit is $5,000 and you have a balance of $2,000, your available credit is $3,000.

As a practical matter, you may hit your limit, but going over it can be rare. Credit card companies are required to ask card members to opt into the ability to make overlimit transactions in return for overlimit fees, or else they cannot charge them. For this reason, many credit card issuers may simply decline over-limit transactions.

However, it may not be a good idea to go over the limit. If you do go over, your credit card issuer may charge you overcharge fees, decrease your credit, or increase your minimum payment. Additionally, going over the limit can increase your credit utilization ratio, and this can lower your credit score.

For this reason, it may be important to know your credit limit on your credit card and keep track of your spending on it.

Credit card companies may review your personal financial profile before setting your credit limit. Important factors that can impact your credit limit include:

• Your Credit Score
  Your credit score is an important factor that credit card companies will typically consider when determining your credit limit.¹
• Your Income
  Your income is another important factor that can impact your credit score. Credit card issuers will want to make sure you’ll be able to afford the card’s minimum payments.²
• Your Payment History
  Your payment history could impact the credit limit that you get approved for as well. Do you have a history of paying your bills on time?³
• Your Debt-to-Income Ratio
  Your credit card issuer may also consider your existing debts, along with your debt-to-income ratio (DTI).⁴

Over time, a credit card company might offer to raise your limit, depending on how well you’ve been managing your credit card. Or they might automatically raise the limit and simply inform you after the fact. You can also request a higher limit. For more information, see: “How to Increase Your Credit Limit.”

Credit card companies may also decide to 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 this happens, you may have the option to appeal a reduction. Consider giving your credit card company a call if you want to inquire about having your credit limit restored.