What does your credit limit really mean?

By John A. Carson Last updated Mar 26, 2022

NEW YORK – March 10, 2022 – (Newswire.com)

iQuanti: You’ve probably noticed on your credit card statement or online dashboard that you have a credit limit. What is a credit limit and what does it actually mean?

Your credit limit is the total amount of money that the credit card issuer is essentially willing to lend you at all times for your purchases. For example, if your credit limit is $10,000, you can spend up to $10,000 on goods and services. Anything above this limit will be automatically denied.

Your credit limit does not restart each billing cycle. It is a continuing balance that is only restored as payments are made. If you accrue interest or finance charges, these will also be subtracted from your available credit limit.

In this article, we’ll explain how a card issuer determines your credit limit and some best practices for using it responsibly.

How is my credit limit determined?

Your credit limit is based on a combination of several different factors:

Credit history: Issuers will want to review your payment history and the number of other lines of credit you have opened. Generally speaking, the better your FICO score, the higher your limit will be.
Financial situation: A lender will always want to know if you are financially able to pay your bills. Therefore, they will ask you about your gross income and your recurring debts such as your mortgage, student loans, car loans, etc. This will be used to estimate your debt to income ratio (DTI). Usually a lower DTI means an upper limit.
Employment history : The longer you have been employed, the higher your credit limit will be. This is because it is assumed that you will have better income stability.
Derogatory marks: Your credit history may also contain notes about bankruptcies, collections, civil judgments, or tax liens. These items could potentially reduce your credit limit.
The subscription process: Each credit card company will have different rules on how they use the information above to calculate your credit limit.

Can my credit limit be increased?

Absoutely. Often, the credit card company will periodically increase your credit limit on its own initiative. This usually happens after several months or even years of demonstrating a reliable payment history.

You can always make a special request to the credit card company to increase your limit. This can be done online or over the phone. Approval will usually have to go through a manual review, so it may take a few days before a decision is made.

If you formally request a credit increase, the issuer will again ask you questions about your financial situation. They can even ask for proof of income (like recent pay stubs or a W-2). This is how they can validate that you are currently making more money and can handle a higher limit.

Responsible use of your credit limit

Even if the card issuer gives you a credit limit, using too much can hurt your FICO score. For this reason, experts recommend never using more than 30% of your available credit. For example, if you have a credit card with a limit of $10,000, the maximum you should use is $3,000.

One way around this rule is to simply have more than one credit card. For example, if you have two credit cards with a limit of $10,000 each, you can actually spend up to $6,000 between them. Credit score aside, it’s always a good idea to use your cards responsibly and never spend more than you can afford.