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How is your credit limit determined?

December 16, 2022, 3:20 PM UTC
Photo illustration of a close up of a man's hands holding a credit card and using a laptop.
Factors that credit card issuers consider when establishing your limit include your income, credit utilization, and payment history.
Photo illustration by Fortune; Original photo by Getty Images

When opening a new credit card, the issuer automatically sets a credit limit—which is your spending threshold for the card. It can often be mystifying as a consumer trying to understand how that limit is established.

The reality is that various factors contribute to the decisions made by credit card issuers. Key among the considerations are your credit score, payment history, income, and debt-to-income ratio (DTI).  

What is a credit card limit? 

A credit card’s limit is the maximum amount you are allowed to spend. The limit typically includes purchases, balance transfers, and also cash advances. Each of these transactions reduces your available credit line until you make a payment that pays down the card’s outstanding balance.

“A credit limit is the absolute maximum amount of money that a lender will allow a consumer to borrow while using a credit card or line of credit,” says Rachana Bhatt executive vice president, credit card, unsecured lending, and retail lending distribution at PNC Bank.

If you exceed the credit limit established by the card issuer, there may be a penalty or other negative consequences. 

Factors that impact your credit card limit 

While the exact formula for establishing an applicant’s credit limit may vary based on the credit card issuer, there are generally some key factors that play a role in the decision making process across the board.

“Most card issuers determine a credit limit by checking your credit reports and annual income,” says Stephen Ciliak, lending product manager at Alliant Credit Union. “Your repayment history, mortgages, student loans, auto loans, and more are also factors that are considered when issuing a credit limit, along with the amount of inquiries initiated on your credit report and the number of derogatory marks.”

Derogatory marks may include bankruptcies or collections that appear on your credit profile, which are a red flag for credit card companies when considering your ability to repay debt.

Income and debts

Both your annual income and your outstanding debt are significant factors in a credit card issuer’s deliberations. Lenders are required to review each applicant’s ability to make payments toward a credit card or line of credit by taking into account the applicant’s income and other obligations.

If your debt is too high in comparison to your income—which is known as your debt-to-income ratio (DTI)—you may be turned down altogether for a credit card.

“We ensure that the consumer will be able to service the increased debt,” says Sara Breyfogle, senior vice president, and chief credit officer for Discover Financial Services. 

Payment history  

Do you have a history of making on-time payments? Or does your credit profile reveal a track record of delinquent or late payments? Credit card issuers will be looking at this part of your financial profile as well when establishing a credit limit.

“Late payments of 30 days or more stay on your credit report for up to seven-and-a-half years,” says Ciliak. “By maintaining a reputable payment history and continuously paying bills on time, your credit score will improve.”

And ultimately, having a higher credit score improves your odds of receiving a higher credit limit.

Credit utilization 

If you are using your existing lines of credit up to their limit, this can be a red flag for credit card issuers as well. It indicates you may be spending beyond your means. And here, too, a credit card company may be hesitant to give you a significant line of credit.

“The lower your percentage of credit utilization each month, the better,” says Ciliak. “Some of the best credit users utilize less than 7% of their credit limit each month, though a great guideline is to use at maximum 30%.” 

You can significantly improve this part of your profile by making payments on your credit card throughout the month or by making a payment before the end of the billing cycle that lowers your credit utilization.

Can you spend over your limit?

There are various potential ramifications if you spend beyond the credit limit established by your card issuer. Often the transaction that puts you over the limit will be declined. But that’s not all.

“Although it varies from lender to lender, there are usually a few common consequences when a consumer overspends,” says Bhatt. “Consumers may be charged with high fees or interest penalties and [incur] high-interest-earning debt. Spending over a credit card’s limit may also affect a consumer’s credit score.”

If you opted into a program with your credit card issuer that allows over-the-limit transactions, you may be charged a fee for exceeding the limit, according to the Consumer Financial Protection Bureau (CFPB). But you must have expressly consented to participate in the over-the-limit fee program in advance. And the issuer must also provide written information about the fee schedule associated with over-the-limit purchases. 

Overspending fees can range from $25 to $35. However, as part of these programs, credit card issuers are not allowed to impose more than one over-the-limit fee per billing cycle, the CFPB explains.

The takeaway

When opening a new credit card, the issuer will establish a credit limit. This is the maximum you’re allowed to spend. You can increase your chances of obtaining a higher limit by paying attention to the factors that card issuers review as part of their decision-making process and taking steps to improve some of these areas in advance. This should include reviewing your credit profile and correcting any errors, as well as ensuring you have a history of making on-time payments. It’s also a good idea to minimize the amount of your credit limit that you are currently using across existing accounts.

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