A credit limit describes the amount of money you can borrow from your credit card issuer at a given time. Understanding how credit issuers determine the maximum amount they’re comfortable loaning you can help you gain a better understanding of finances and potentially save you money.
To manage risk, credit card companies consider a lot of information when you apply to open a new account. These details—like your credit history, credit score and income—influence whether you can open a new account. Beyond the initial approval or denial, those same factors matter again when the card issuer sets the terms of your account, including your interest rate and credit limit.
Knowing the details that matter to credit card companies puts you at an advantage. You can work to become a low-risk borrower in the eyes of credit card issuers and lenders and position yourself to receive more attractive terms like lower interest rates and higher credit limits.
Factor #1: Your Credit Information
Credit card issuers consider your credit information when setting your credit limit. That probably comes as no surprise. Your credit history and credit score can tell a company a lot about your debt management habits.
Credit history provides a look back at how you’ve managed your credit obligations in the past, with credit card accounts and beyond. A credit score, however, is a predictive tool that lenders can use to assess risk. Both a FICO® Score and a VantageScore credit score can tell a lender how likely you are to become 90 days late (or worse) on any credit obligation.
A good credit score indicates a lower risk level, which could help you qualify for a higher credit limit. Conversely, a bad credit score could shrink your credit card options, and make you more likely to receive lower credit limits on your accounts for which you do qualify.
Factor #2: Debt-to-Income (DTI) Ratio
The relationship between the income you earn and the debts you owe is another detail that may help determine the credit limit you receive. This figure is called your debt-to-income ratio, or DTI ratio. You can calculate this number by dividing your monthly debt payments by your gross monthly income.
Your DTI ratio can help a credit card company figure out your capacity to take on more debt. If you already owe a large amount relative to your income, a new, high credit line might overextend you. But if you have a low DTI ratio, you’re less likely to experience a problem in this area.
Factor #3: Credit Utilization Ratio
Not only do creditors look at your overall DTI ratio, but also how you manage the credit card accounts you already have open. If you owe high outstanding balances compared to your credit card limits, then your credit utilization ratio is high, and that status could cause you problems.
High credit utilization doesn’t tend to look good on new credit card applications. To make matters worse, it could damage your credit score as well—even if you make a habit of paying on time each month.
Finally, high credit utilization can often be expensive. The average interest rate on a credit card (among those that assessed interest) was 22.77% in Q3 of 2023 according to the Federal Reserve. But if you pay off your credit card balances each month (ideally before the statement closing date), you may be able to keep your credit utilization rate low and avoid high-cost interest fees simultaneously.
Factor #4: Relationship With the Creditor
If you’ve done business with a credit card issuer before, the company will likely consider that relationship when it decides whether to approve you for a new account. Should a card issuer approve you, it may also consider your past or current dealings when setting the credit limit on your new account.
Previous defaults or debts charged off in bankruptcy could be a deal breaker where credit card approval is concerned (at least for the same creditor). Of course, that doesn’t mean you won’t be able to open a new credit card elsewhere, even after bankruptcy.
In a situation where you have existing credit cards with a credit card company, your existing credit limits might also impact you. A card issuer might prefer to extend a lower credit limit if you already have what it considers to be a high amount of credit available on other accounts it owns. (Note: If this happens to you, you can consider asking the card issuer to “move” a portion of your credit limit from an older account to the new one.)
Factor #5: Details You Cannot Control
Certain factors that influence your credit limit could have nothing to do with you. The economy and future economic predictions, for example, might make a credit card company feel more or less comfortable extending credit. During the early phase of the 2020 pandemic, credit card issuers lowered credit limits for many customers. They made these moves in an attempt to reduce their exposure to customers who could not afford to pay their bills as promised.
New or pending credit card legislation could also make a difference where credit limits are concerned. When the CARD Act of 2009 passed, some card issuers attempted to control their risk exposure by cutting credit lines for customers who had too much unused credit.
How Your Credit Limit Can Affect Your Credit Score
The relationship between your credit limit and the balance on your credit card is called your credit utilization rate. It is a major factor in your credit score, with lower credit utilization levels being best. A higher credit limit could make it easier to keep your credit utilization rate low.
To calculate credit utilization on an individual account, a credit scoring model considers two details from your credit report—your credit card limit and balance. It’s the numbers on your credit report that matter here, not the real-time balance on your account. That’s an important detail to note since credit card companies usually only update your account information once a month with the credit reporting agencies (Equifax, TransUnion and Experian).
The more distance there is between your credit card balance and limit, the better (which is where the benefits of a higher credit limit can come into play). More distance between these two figures should lead to a lower credit utilization rate.
The Potential Credit Score Benefit of a Higher Credit Card Limit
Here’s an example to help you understand how a higher credit limit might help your credit score. Imagine your credit report shows an account with the following data.
- Credit card balance: $1,000
- Credit card limit: $1,000
Your credit utilization rate would be 100% in the scenario above because you’re using all of your available credit. A 100% utilized credit card could damage your credit score.
Now, let’s assume the credit card account on your credit report looks a bit different.
- Credit card balance: $1,000
- Credit card limit: $10,000
In this second scenario, your credit utilization rate is only 10%. That figure should be much better for your credit score.
Of course, it’s important to point out that a higher credit limit only has the potential to benefit you if you manage your credit card responsibly. If you overextend yourself and continue to charge purchases until you max out your account, a higher credit limit will just lead to more credit card debt. As a rule of thumb, you should aim to pay off your full statement balance every month, no matter how high or how low your credit limit sits.
Asking for a Credit Limit Increase
If the current credit limit on your account isn’t as high as you wish it was, there is good news. Credit card issuers may increase your limit over time. It’s also possible to proactively request a credit limit increase on your account.
Keep in mind that the factors that can affect your initial credit limit assignment may also impact your ability to receive a credit limit increase. But if you work to pay down credit card debt or improve your credit score, such actions might improve the odds of your card issuer approving your request.
It’s also important to let your credit card company know if your income increases, especially if you’re hoping for a higher credit limit. More income could lower your DTI ratio, provided you don’t take on new debt at the same time.
Bottom Line
Credit card issuers base the credit limit they extend to you on a combination of things, but primarily on how you’ve handled your existing credit up to that point. Having a high credit limit can be a boon to your credit score, but only if used responsibly. Before you apply for a new card, be aware that likely you won’t have advance notice of what the credit limit on your new account will be, so choose a card based on your particular spending patterns and needs and not on a credit limit you’re hoping to receive.
