Just before the COVID-19 outbreak, credit card balances in the U.S. topped $893 billion. Now, six months into a global pandemic, consumers are hoarding cash, and credit card usage is down. But for those who need more access to credit or are planning to use this time to improve their personal financial situation, you’ll want to learn what a credit limit is, how your credit limit is set, and options for increasing your credit limit should you need more buying power during these unprecedented times.
What is a credit card limit?
A credit card limit is the maximum amount you’re allowed to spend on any given credit card. There are other common names for a credit card limit such as spending limit, or line of credit. These terms are often used interchangeably, but they all mean the same thing.
What factors determine credit limit?
Applying for a credit card online that boasts “instant approval” gives the appearance that lenders make quick decisions, but there are many factors at play when determining your overall credit limit.
- Type of credit card
- Credit score and credit history
- Income
- Debt-to-income (DTI) ratio
Type of credit card
Different cards have different limits — and some cards do have set limits for all cardholders, although most cards offer a range. For example, a card could have a range of limits anywhere from $1,000 to $10,000. The limit you’ll receive likely depends on where your credit score falls within a range of limits.
Credit score and credit history
The credit card issuer determines the limit — but your credit score can definitely impact the ranges you fall into. The higher your credit score, the higher the limit you are likely to get.
Those with thin credit profiles and a poor score may have a harder time getting approved for a card with lucrative perks, or if they do, the limit will often be very, very low.
Income
It isn’t a guarantee if you have a large income you’ll be approved for a high card limit. With that said, having a higher income can increase the limit for which you’ll be approved.
Debt-to-income (DTI) ratio
When it comes to all borrowing decisions — from credit cards to personal loans to car loans — creditors are very interested in your debt-to-income (DTI) ratio. Creditors really want to know how much of your take-home pay you are spending on other outstanding debts and obligations.
From a healthy credit perspective, consumers want to keep their DTI below 30%.
How do I get a higher credit limit?
There are two ways to get a higher credit limit:
1. Ask your current card company for an increase
Many card companies offer the option to ask for an increase online via their online banking portal. Keep in mind asking for an increase may result in a hard inquiry, which does show up on your credit report and can potentially impact your score.
2. Apply for a new card or personal loan
Having more than one card is a good idea for your score, as it contributes to your overall “credit mix” which makes up 10% of your score. Applying for a new card can also be a way to increase your limit and gain access to a low-interest promotional or balance transfer offer at the same time.
Promotional offers can provide cardholders with a way to pay off debt faster (and more cheaply) and the ability to buy essentials at a much lower interest rate for a specified period of time.
How does your credit limit affect your credit score?
Many consumers regularly ask for a credit limit increase as a way to quickly and easily improve their credit score. Here’s why: When the limit on a card increases, your total percentage of credit utilization decreases — provided you keep the limit but do not rack up any more debt.
Creditors like to see borrowers with low credit utilization as this indicates an individual is more likely to have a healthy relationship with credit, live within their means, and pay back any and all debts.
Three credit limit tips
- Check your debt-to-income ratio first
- Shop card offers
- Be persistent
1. Check your debt-to-income ratio: Tally up how much you’re putting toward paying down debt each month and divide by your monthly take-home income. Multiply this number by 100 and this is your debt-to-income ratio. If there is “room,” meaning it is below 35%, you’ll likely be approved for the new card or a bigger limit.
If you’re close to the “edge” of an unhealthy debt-to-income ratio, you may be turned down, or only approved for a very small amount.
2. Shop around: “Shopping” card offers — from rewards cards to cards with a sign-up bonus — ensures you get the most competitive offer and the best card to meet your personal finance requirements (plus, your bank account will thank you).
3. Be persistent: If your card company declines to increase your limit, it’s important to note you can ask again in a few months. In the meantime, it’s best to actively work to improve your credit score: dispute any errors, pay down balances and make all payments on time in the interim.
