A credit limit is basically what the term suggests: A financial cap on a credit card account that limits how much money the cardholder can borrow from the card issuer. By including a maximum spending amount, the card issuer buys itself some protection against the cardholder borrowing more than they can pay back on an ongoing basis.
There’s more to the story, however, when it comes to credit card limits and how they’re determined. Here’s a closer look at what a credit limit is and what happens if you go over your credit limit.
What Is a Credit Limit?
As mentioned, a credit limit is the maximum amount that you can charge with your credit card, which represents a line of credit. The amount is determined based on information provided in a credit card application, such as the applicant’s credit score, income, and existing debts. Usually, the higher the credit, the higher above the average credit card limit someone will receive.
It’s also important to note that credit card limits aren’t set in stone. A cardholder may receive a higher credit card limit if they make their payments on time and stay well within their credit limit. Conversely, if card payments are late (or worse, not made at all) or if there are other signs of risk, such as nearing or exceeding their credit card spending limit, then the card issuer may decrease someone’s credit limit.
Recommended: What is a Charge Card
Credit Limit and Available Credit
Each purchase made with a credit card is deducted from your total credit limit, resulting in your available credit. For example, let’s say someone has a credit limit of $10,000. If they spend $2,000 at a store that accepts credit card payments, their available credit falls to $8,000. If they were then to make a $1,000 payment, their available credit would increase to $9,000.
Thus, your available credit will fluctuate over time depending on purchases and other transactions you’ve made, as well as any payments, including credit card minimum payments, made on the account. Your credit limit, on the other hand, remains constant regardless of account activity.
Credit Limit and Credit Scores
There’s another good reason to keep your credit card spending in check, and significantly below your card limit — it affects your credit score.
When FICO calculates its benchmark credit scores, it places a significant weight (30% of its total credit score calculations) on credit utilization. Credit utilization ratio compares the amount of credit a cardholder is using to the total available credit they have.
For instance, a card owner may have $10,000 in total available credit, but owe a total of $9,000 on the card. That represents a 90% card utilization, which is considered high and may raise a red flag for lenders as it suggests overspending and potentially an inability to pay. As such, a high credit utilization ratio could result in a lower credit limit for the cardholder, whether that’s a decrease on their existing limit or lower limits offered on new accounts.
It’s usually recommended that cardholders keep their card utilization rate below 30% to avoid negative effects on their credit score. In the above example, that means the cardholder with a $10,000 credit card limit shouldn’t owe more than $3,000 on the card.
How Much of Your Credit Limit Can You Use?
Technically, you can spend up to your credit limit. However, using too much of your total credit can adversely affect your credit utilization ratio, a key factor in determining your credit score.
It’s suggested to keep your credit utilization below 30% — which means using no more than 30% of your overall credit limit. This is why it’s always important to make payments, even if you’re in the process of requesting a credit card chargeback or other dispute.
How Is Your Credit Limit Determined?
The formula for determining a credit card limit depends on which scoring model the card provider uses. Generally, one of three distinct credit limit models is used: credit-based limits, predetermined credit limits, or customized limits.
The Credit-Based Limits
With credit-based limits, card providers leverage your credit score to determine credit limits. In doing so, card companies rely on the same financial formula that credit scoring agencies use to create a credit score — a cardholder’s payment history, credit utilization rate, total length of credit history, credit mix, and any new credit inquiries. Card companies may also take a close look at the card owner’s total annual income, total household expenses, and type of employment.
Basically, the better you are at making on-time credit card payments, curbing household debt, and handling consumer credit, the more likely you are to get a higher credit card limit under the credit-based limits model.
Recommended: When Are Credit Card Payments Due
The Predetermined Credit Limits
This credit limit calculation model relies on a “ladder approach” to determine credit limits. In this scenario, credit card issuers assign a credit limit based on the type of card. In other words, every card in a certain tier — such as an entry-level card or a premium rewards card — would come with the same credit limit rather than the credit limit being determined based on the individual consumer.
The more features and amenities a credit card has, the higher the credit limit typically is under this model. For example, a premium credit card with robust benefits and generous cash-back rewards may have a credit limit of $10,000. Meanwhile, a more bare bones credit card for entry-level cardholders may have a credit limit of $500.
The Customized Credit Limits
With customized credit limits, card providers tailor the credit limit to the individual credit card consumer. They may do so in different ways based on different criteria.
For example, one credit card issuer may base its decision on a cardholder’s annual household income, while another may prioritize the number of credit cards an individual already owns, along with their existing credit limits.
In that way, card companies are drilling down into an individual’s financial history and basing their credit limit decision on myriad factors. Once again, the stronger a card candidate’s financial resume, the more likely that individual is to receive a higher credit card limit.
Recommended: Tips for Using a Credit Card Responsibly
Can You Spend Over Your Credit Limit?
In general, credit card companies prevent spending over the credit card limit.
When a cardholder has reached their limit and attempts to use their credit card, the transaction may be declined.
In some instances, however, the card issuer may allow the transaction to go through and instead impose a financial penalty for spending over the credit card limit. According to the Credit Card Act of 2009 (CCA), the card company can’t assess a fee that’s more than the amount spent over the credit limit. So, for instance, if you overspent by $30, your fee couldn’t be more than $30.
Typically, the card owner must opt in to allow for purchases over the credit limit to be approved. The CCA legislation mandates that credit card companies can’t arbitrarily charge an over-the-limit fee without the cardholder’s signed consent. For that reason, most card providers have eliminated over-the-limit fees and simply deny the transaction instead.
Check with your card company to see if it still charges over-the-limit fees. If so, and you object, ask to opt out and focus on keeping your credit card balance well below your card spending limit.
Is It Possible to Increase Your Credit Card Limit?
Credit card limits aren’t static. They can go up — especially if a card customer asks for a credit limit increase — and they can also go down.
Perhaps the easiest way to increase your credit limit is to contact your card provider and ask for a credit limit boost. You can usually make this request over the phone or on the card issuer’s website or mobile app.
Before you make any request for a credit card limit increase, check your credit report to see that your financial health is in good standing, as your card provider will likely treat your request for a credit limit hike like any request for credit. That means a thorough credit check to ensure your credit card payment history is strong, your credit score is good, and your job situation or annual household income hasn’t deteriorated.
The credit card company will review those financial factors and let you know whether or not your request for a credit increase is approved. If you’re denied a higher credit limit, your best recourse is to take some time to improve your credit score and build a stronger credit profile.
In some cases, you can apply for a new credit card with a higher credit limit. However, expect any new card issuer to conduct the same rigorous credit vetting your original card company conducted given how credit cards work.
Credit card companies assign credit card limits to consumers based on one of three typical models. Often, your ability to handle credit and pay it back on a timely basis comes into play when determining how high your credit limit is. If you’d like a higher credit card limit, you can ask your current card issuer if your financial status has improved, or you could consider applying for a new credit card.
If you’re looking to apply for a credit card, consider the card offered by SoFi. SoFi cardholders earn 2% unlimited cash back when redeemed to save, invest, or pay down eligible SoFi debt. Cardholders earn 1% cash back when redeemed for a statement credit.1
The SoFi Credit Card offers unlimited 2% cash back on all eligible purchases. There are no spending categories or reward caps to worry about.1
Can lenders change credit limits?
Yes, lenders can change credit limits — particularly if a credit card holder asks them to do so. But credit limits are unlikely to change for the better unless the cardholder has a solid credit history and financial situation.
What is a normal credit card limit?
That depends on the individual and credit card companies, but the average credit limit for U.S. cardholders was $30,365 in 2020, according to a recent report by Experian . That said, individual credit card limits can vary depending on a variety of factors, and can be as low as $300.
How do I get a high credit card limit?
The best way to get a high credit limit is to display habits that show creditors that you’re a low credit risk. That means paying your bills on time, keeping debt low, and having a robust credit history.
1See Rewards Details at SoFi.com/card/rewards.
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
The SoFi Credit Card is issued by SoFi Bank, N.A. pursuant to license by Mastercard® International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.
1Members earn 2 rewards points for every dollar spent on purchases. No rewards points will be earned with respect to reversed transactions, returned purchases, or other similar transactions. When you elect to redeem rewards points into your SoFi Checking or Savings account, SoFi Money® account, SoFi Active Invest account, SoFi Credit Card account, or SoFi Personal, Private Student, or Student Loan Refinance, your rewards points will redeem at a rate of 1 cent per every point. For more details please visit the Rewards page. Brokerage and Active investing products offered through SoFi Securities LLC, member FINRA/SIPC. SoFi Securities LLC is an affiliate of SoFi Bank, N.A.
Photo credit: iStock/RgStudio