Written by: Eric Bank
Edited by: Austin Lang
Reviewed by: Jon McDonald
I remember when I was just a kid, Mama sat me down, looked me straight in the eye, and told me I could be anything I wanted — the sky’s the limit, or so she said. Well, fast-forward through the years, and that sweet idea didn’t stand a chance against reality. Everything has a limit, especially your credit.
A credit limit is the maximum amount of money you can spend on a credit card or line of credit.
A credit limit represents how much spending power you have. The total credit that you can spend on your card shows how much money the issuer trusts you with. In other words, it’s how much you can borrow before the well runs dry based on how much confidence the issuer has that you will pay up.
So, I’m going to walk you through how credit limits work and what gets them moving up or down. I’ll even include some tips to help you manage your card better and make peace with your credit limits.
Credit Limit Basics
Your credit limit is the top of the barrel — once you reach it, your credit card balance is full and you may not be able to charge more without exceeding your limit.
Credit card companies set your limit based on how your finances stack up and whether they think you’re a safe enough bet. They aren’t about to hand out money to people who might go bust and leave them high and dry.
So, let’s get a grip on how your credit limit works and how they keep a tight rein on your spending. If you play your cards right, you’ll keep your credit accounts healthy and in good standing.
Products with Credit Limits
A credit limit is typically for credit cards or lines of credit and represents the amount of money the issuer feels comfortable lending you. Credit cards give you a set amount you can spend, and once you’ve reached that upper threshold, the issuer will typically block further spending until you make a payment.
The same is true for lines of credit. Limits are in place to prevent you from spending more than approved by your creditors.
Your limit reflects your riskiness as a borrower. Issuers give your finances a good hard look, and if you’re doing alright, then they’ll let you borrow a bit more.
If they think you are a risky borrower because of a low credit score, they’ll keep that limit tight. It’s important to know how much credit they’re giving you, or you may suffer embarrassing and inconvenient rejections!
Credit Limits vs. Available Credit
Your credit limit is the maximum amount card issuers let you borrow. Available credit, on the other hand, is what’s left over after subtracting your current balance. You want to keep that balance low (see credit utilization ratio below).
Your credit limit is the line in the sand for all of your card uses: purchases, bill payments, balance transfers, cash advances, fees, and interest. Some card issuers, such as Chase Bank, usually put a much lower limit on cash advances.
With that in mind, be careful at the ATM, or it could leave you high and dry when you need some fast cash. Also, understand that interest starts immediately on cash advances, so if you’re already near your credit limit, you should be twice as cautious.
How Lenders Determine Credit Limits
When you’re itching to get a credit card, issuers just don’t hand them out without taking a good, long look at your finances first. They’ll evaluate your credit report, check your credit score, review your income, and calculate your debt-to-income ratio to decide how much credit to give you.
Your credit scores influence your credit limit. They are three-digit numbers (from a low of 300 to a top score of 850) summarizing how well you’ve been managing your credit. The higher you climb that scale, the more reliable you’ll seem, and you’ll be a cinch to receive a bigger credit limit.
However, when your score’s ailing, you’re sending out a signal that you’re a risky bet. Accordingly, your credit limit will remain low.
Now, if you’re boasting a high income, you’re in a fine spot to handle a larger credit limit. When you have a good cash flow, you can pay your debts without too much difficulty. Issuers may ask for documentation, such as pay stubs or tax returns, to verify your income.
Another important factor is your debt-to-income (DTI) ratio, which is your monthly debt payments divided by your monthly income. If it’s low, your finances are in good shape, which means you may deserve a higher credit limit.
But when your DTI is higher than a weather balloon, you’re stretching yourself too thin. That’s when issuers can get spooked and stick you with low credit limits just to keep things safe. Most lenders are looking for you to keep your DTI under 36%.
The issuer may raise the limit without prompting, presuming you have been handling your card responsibly, paying your bills on time, and keeping your balances low.
Every so often, card companies will take a fresh look at your account to see if anything has changed: Your credit score is improving, you’re bringing in more money, or your financial situation is looking better than before.
If you are in a strong position, you can request a higher limit — I suggest you don’t do so more than once every six months or so.
If things are going well, they might pump up your credit limit. But if things start going downhill, they’ll reel it in quicker than you can say, “Ouch!” Typically, they take a look every six to 12 months to figure out where you stand.
Just be certain you’re riding high, maybe after snagging yourself a raise or knocking down some debt. That’s when you’ll have the best possible chance of getting the thumbs-up from the issuer.
How Credit Limits Impact Your Finances
Credit limits have a big say in how your credit scores look. Let’s take a deeper dive into the impact of having a credit limit, including both risks and benefits.
Impact on Credit Utilization
You want to keep your credit utilization ratio (CUR) under 30%. Your CUR is the amount of credit you’re already using divided by your credit limit. A good CUR shows that you manage debt responsibly and aren’t over-reliant on credit.
Here’s an example CUR calculation for someone who has three credit cards and a $10,000 overall credit limit:
| Card A | Card B | Card C | Overall | |
|---|---|---|---|---|
| Balance | $500 | $0 | $2,150 | $2,650 |
| Credit Limit | $2,000 | $3,000 | $5,000 | $10,000 |
| Utilization Ratio | 25% | 0% | 43% | 26.50% |
The easiest ways to keep your credit in good shape are to stay below your card limit, pay your bills when due, and manage your debt responsibly, like a seasoned bronco buster instead of a rodeo clown.
Busting through your credit card limit will damage your credit utilization ratio. That’s a red flag to credit bureaus and creditors. Sure as shootin’, they’ll ding your credit scores when that happens.
Interest Charges and Payments
When you’re too close to your credit limit, you may be courting trouble. The nearer you get to maxing out your card, the more interest charges start piling up. The higher your balance, the more the card will charge you, leaving you with a bigger headache to deal with.
If you’re only paying the minimum every month, then interest charges will mount up a lot quicker than you might expect. You could wind up paying more in interest than the cost of the initial purchase!
And once that snowball starts down the hill, it sure gets a lot harder and harder to stop. Before long, you’re spending your hard-earned money just to cover the interest, and that’s the surefire way to find yourself knee-deep in debt.
To steer clear of interest charges, the best move is to pay off as much as possible each month. That way, you aren’t fattening up the issuers more interest while you keep your hard-earned money where it belongs — in your own pocket!
Spending Management
You may find it easy to spend right up to your limit and keep yourself in a deeper hole. Just because the issuer gives you a credit limit doesn’t mean you should use all of it. I’m not particularly eager to preach, but in this case, I advise you to use your credit wisely, or you might find yourself drowning in debt.
The trick to staying out of trouble is to respect your credit limit as if it were an electrified fence. You could walk right up to it, but it’s best to leave yourself some space.
By keeping your credit utilization ratio low, you show the credit card issuers that you know how to wrangle your finances. Then, they may trust you more and, in turn, grant you a higher limit. More importantly, it keeps you from spending more than you can handle.
“By keeping your credit utilization ratio low, you show the credit card issuers that you know how to wrangle your finances.”
The name of the game here is responsibility. If you can handle your credit limit without overspending, you’ll keep yourself out of trouble. Stick to buying what you can afford, and make sure you can pay off what you charge. Do that, and you’ll be keeping your financial house in order with no nasty surprises waiting for you when the bill comes.
Possible Consequences of Exceeding Your Credit Limit
Now, if you try to buy something too expensive for your credit limit, chances are you will find yourself in an inconvenient situation!
Transaction Denials
The first thing that may happen is also the most obvious if you don’t have any credit limit remaining. If you’re over your credit limit, you may get flat-out refused right there out at the register.
Can you imagine how embarrassing it feels?
Staying alert to your credit balance will help you avoid shopping surprises.
Penalties and Fees
Some credit cards will slap you with penalty fees if you go over your limit. If you’re already carrying a balance over several billing cycles, the interest and fees will pile up even faster.
Before long, you’ll be dealing with a flood of debt that is mighty difficult to drain away.
Moreover, some card issuers will nail you with a penalty interest rate if you violate any conditions of your cardmember agreement, such as making late payments or exceeding your credit limit.
These rates are generally higher than a circling buzzard compared to your regular APR and will jack up your costs faster than you can say, “Dang it!” Being a thoughtful credit customer will help you avoid penalty rates.
Credit Limit Reductions
If you haven’t watched your money as closely as the farmers watch their crops, your issuer may chisel down your credit limit faster than a rodeo bull can throw a cowboy.
There are usually ample reasons why they will do so. Perhaps your credit score took a nosedive, or your income isn’t steady anymore.
When your credit limit goes down, it can hammer your financial outlook. For example, your credit utilization ratio will immediately jump higher and may immediately drag down your credit scores. Not to mention, having less credit means less cushion for emergencies or those big purchases that you may need to make.
If a lender cuts your credit limit, you’re going to feel it if you’ve been using most of it every month. It will also make you look so much riskier in the eyes of future lenders.
The best way to prevent this is to stay on top of your payments, keep your credit balances low, and show creditors that you’re a safe bet.
Getting Trapped in a Debt Cycle
When you live around your credit limit, you face the prospect of paying mounting interest costs without giving yourself much breathing room after each monthly payment. With each swipe of the card, you dig a deeper hole until it’s too deep to climb out.
“The best way to prevent this is to stay on top of your payments, keep your credit balances low, and show creditors that you’re a safe bet.”
Being trapped in a debt cycle makes it difficult to see your way out. The interest will just continue to rack up. In the long run, you may spend more on interest than your actual balance if you continue paying interest on a maxed-out credit card.
It is as if money is literally poured down into a pit that never fills up and gets deeper every month.
The only way to get out is to stop digging that hole. You’ve got to rein in your spending, pay more than the minimum when you can, and don’t go over your credit limit.
Otherwise, you’re just riding in circles, and that cycle of debt will just keep on whirling around you like a tumbleweed in a windstorm!
Credit Limits are Necessary Guardrails
Credit limits serve as an important guardrail for credit cards and financing. Essentially, they keep you from tumbling off the edge into an economic mess. Credit limits allow lenders to set boundaries on how much you can borrow to keep you on the straight and narrow so as not to overextend yourself.
Without those limits, people may be tempted to spend beyond what they can afford, and that can cause a whole lot of trouble down the line. Clearly, credit limits protect you and the lender.
It’s a good idea to manage your credit wisely within those guardrails. By sticking well under your limits, paying down your balances, and generally using your credit responsibly, you can not only avoid sky-high interest on a larger balance but also build trust with your lender.
In time, it’ll provide you with more chances for higher limits and better credit terms. So, treat that credit limit like a high fence that keeps your herd from wandering off, and you’ll thank your lucky stars.
