What Is a Credit Limit?

A credit limit is the maximum amount you can charge on your credit card, which is predetermined by your card issuer. The larger your limit, the more you can spend on your credit card. Credit card issuers use several factors to determine your credit limit, including your income, credit score, and other financial considerations. To qualify for the highest credit limits, be sure to maintain a credit score of at least 670.

How a Credit Limit Works

When you make purchases with a personal or business credit card, the total amount is deducted from your credit limit and shows as a balance on your credit card statement. Your remaining limit determines how much more you can spend on your card. You may spend up to the maximum limit available on your card. However, if you exceed your limit, you may be charged with over-limit penalties.

The amount you charge on your card will make up your total balance, which is expected to be repaid monthly. However, you are only required to pay the minimum payment every month. Your minimum payment is typically a percentage of your total current balance. As you repay your balance, you can reuse your available credit. Even though different types of cards have various limits, both personal and business credit cards work the same way.

How a Credit Limit Is Determined

When you apply for a credit card, the issuer will require you to disclose certain financial information like your monthly housing payment and income. Based on that information and your credit score, the issuer determines the amount of credit you will receive. If you are granted a high credit limit, it usually means they trust that you can repay your debts promptly. Lower limits typically mean the issuer wants to minimize its risk.

Some common factors that determine your credit limit are:

• Credit score: Your credit score determines your creditworthiness based on your credit history. Lenders and card issuers use your credit score to assess whether or not you will repay your debts. Maintaining good credit scores can help you access higher limits.
• Annual income: How much you earn generally affects how much you can afford to borrow and repay. There’s a better chance for you to get a high credit limit if you have a higher annual income. However, this is not always guaranteed as issuers consider other factors, too.
• Payment history: Your credit history shows your ability to manage your debt obligations, including credit cards and any loans. Negative information on your payment history, such as late payments, high balances, and overdue accounts, will make it less likely for you to receive a high limit.

Although credit card issuers determine your limit upon approval, it is possible to increase your credit limit later on, especially when your circumstances have changed. Make sure to use your credit card responsibly and pay your balances on time to avoid any negative marks on your credit report and improve your credit score.

Credit Limit vs No Preset Spending Limit

While your credit limit is the maximum amount you can charge on your card, no preset spending limit means the card has no stated limit. With no preset spending limit, you could make purchases without having to worry about hitting your limit. While traditional credit cards have a predetermined credit limit, charge cards offer no preset spending limit. This is one of the major differences between charge cards and credit cards.

How Credit Limits Can Impact Your Credit Score

Your credit limit can have a positive and negative impact on your credit score. Your credit score is calculated using different credit data from your credit report like your credit utilization ratio, which makes up 30% of your credit score. Your credit utilization ratio measures your credit usage by comparing your credit card balances to your total credit card limits.

As a rule of thumb, it’s always a good idea to keep your credit utilization ratio below 30% to avoid hurting your credit score. If your credit utilization ratio is greater than 30%, it means you are using a lot of your available credit, which can indicate you are a riskier borrower and your credit score may fall. However, if you open a card or increase your credit limit and don’t use more than 30% of your available limit, you may improve your credit score.

Bottom Line

Your credit limit is a predetermined maximum amount you are allowed to charge on your credit card. Credit card issuers use several factors to determine your credit limit such as your annual income, credit score, and credit history. Your credit limit is important because it controls how much you can spend on your credit card.