Credit Limit

Credit Limit
Credit limit is the maximum amount that a financial institution allows a client to borrow.

What is a Credit Limit?

The term “credit limit” applies to two different borrowing products: credit cards and line of credit loans. With credit cards, a credit limit is the maximum amount that the cardholder can charge before risking over-limit fees. In the case of a line of credit loan, credit limit refers to the maximum amount that the loan makes available for the borrower to withdraw.

How does a Credit Limit work with a line of credit loan?

A line of credit is a type of loan that allows borrowers to access as little or as much money as they wish from a predetermined amount. The lender charges interest only on funds that the borrower withdraws. The unused money remains available for the remainder of the “draw period” but does not accrue interest. The maximum amount that the borrower can withdraw is the credit limit.

How is a Credit Limit determined for a line of credit loan?

The credit limit on a line of credit depends largely on whether the loan is secured or unsecured. A majority of credit lines are unsecured, but they are typically only available to borrowers with high credit scores. In determining the credit limit for unsecured loans, a lender will primarily consider a borrower’s credit history.

For secured loans, borrowers offer collateral—such as a house—to obtain a secured line of credit. However, if the borrower defaults on the loan, the lender can seize the property to make up for losses. For secured loans, the value of the collateral will largely drive the calculations behind the credit limit. For secured loans with high-value collateral, lenders will typically set the credit limit much higher than a credit limit on a credit card.

How is a Credit Limit determined for a credit card?

With credit cards, the two main factors that influence a borrower’s credit limit are credit score and personal income. Other factors include repayment history and debt-to-income ratio.[1] These considerations essentially help creditors determine how much a customer can charge and reasonably be expected to repay in full. Customers do not receive their credit limit until they’ve completed an application and been approved for a credit card.

Why does my Credit Limit change on my credit card?

Credit limits might change due to a number of factors including spending, payments, and credit score.

Why did my Credit Limit increase on my credit card?

With increases, credit card companies often grant a higher credit limit as a customer demonstrates good financial standing. However, the companies are under no obligation to do so. They will either notify the customer that a higher limit is available or simply increase the credit limit and inform the customer of the change. Typically, a higher credit limit is beneficial to a customer’s financial standing, as it can improve the credit utilization ratio and provide a cushion for emergency spending. [2]

Why did my Credit Limit decrease on my credit card?

With decreases, a credit card company may lower a credit limit if a customer falls behind in payments or repeatedly exceeds the credit limit.[3] While customers can typically avoid credit limit decreases with good financial habits, credit card companies sometimes lower credit limits for reasons unrelated to a customer’s financial health. Instead, credit card companies might make determinations based on a customer’s buying profile—where the customer shops and what the customer buys, for instance. Credit card companies sometimes use that data to predict whether a customer is likely to get into financial trouble, and though it seems unfair, they are allowed to do it.[4]

Can I request an increase to the Credit Limit on my credit card?

Yes. Customers can contact their credit card company and request an increase. However, the company has the right to deny the request, so it’s important that customers argue convincingly that the increase is warranted. Some factors that might sway the company are:

  • A history of on-time payments
  • An increase in income
  • Low credit utilization (the customer typically uses no more than 30 percent of the credit limit)
  • The customer always pays more than the minimum balance
  • Customer loyalty

Which credit cards have high Credit Limit?

Because credit limits vary based on a user’s credit history, no single card guarantees a high credit limit for all customers. The credit cards that offer the highest credit limits are also generally the ones that require the best credit history for approval.[5]

Are there credit cards with no Credit Limits?

Certain credit cards come with no absolute maximum that a user can charge. (American Express, for instance, offers cards with this feature, which they advertise as lacking a “pre-set spending limit.”[6]) However, while there is no hard cap on the amount that a customer can charge, the companies still limit the card’s purchasing power based on factors like the customer’s income, past credit use, and payment history.

What happens if I go over my Credit Limit on my credit card?

Credit card companies impose over-limit fees and other penalties to customers who exceed their credit limit. For customers who repeatedly break the credit limit, the company may lower the credit limit or close the account altogether.

How much of my Credit Limit should I use on my credit card?

The amount to which a customer uses a credit limit on a credit card is called “credit utilization.” It impacts the customer’s credit score and experts generally agree that credit utilization should be kept below 30 percent. For instance, if your credit limit on a credit card is $10,000, you should charge no more than $3,000 on it.

References:

  1. Hardeman, Bethy. “How Your Credit Limit is Determined.” U.S. News, Dec. 5, 2013. Accessed on October 26, 2016, at http://money.usnews.com/money/blogs/my-money/2013/12/05/how-your-credit-limit-is-determined.
  2. Hamm, Trent. “Why Was My Credit Limit Lowered.” The Simple Dollar, July 30, 2013. Accessed on October 26, 2016, at http://www.thesimpledollar.com/why-was-my-credit-limit-lowered/.
  3. “What Determines Your Credit Limit?” American Express. Accessed on October 26, 2016, at https://www.americanexpress.com/us/content/financial-education/your-credit-limit.html.
  4. Hamm, Trent. “Why Was My Credit Limit Lowered.” The Simple Dollar, July 30, 2013. Accessed on October 26, 2016, at http://www.thesimpledollar.com/why-was-my-credit-limit-lowered/.
  5. “Credit Cards with High Limit.” Cardratings. Accessed on October 26, 2016 from http://www.cardratings.com/bestcards/high-limit-credit-cards?var1=PPC_LP_Test_v1&CCID=20355076204402316&QTR=ZZf20645656Za20355076Zg172Zw49Zm511Zc204402316Zs3086ZZ&CLK=976161109085058789&ac=003&ad=88214430485&sp=&fb=+high%20+limit%20+credit%20+card&mt=b&aceid=&adposition=1t2&dev=c&src=607232&gclid=CKefwv2QnNACFcOGaQodj80Fuw&&WT.srch=1.
  6. “No Pre-Set Spending Limit.” American Express. Accessed on October 26, 2016, at https://www.americanexpress.com/us/credit-cards/benefits/detail/no-pre-set-spending-limit/platinum.