Credit Card Limits

May 11, 2020

Credit Card Limits Title Image

Many Americans use credit cards. If you’re one of them, you probably know that you have a credit card limit. But what is it exactly? This is a term that many people may not understand. We’re going to explain what credit limits are and how they’re determined by your credit card issuer.

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What Is A Credit Card Limit?

A credit card limit is the maximum amount of money you can use on your credit card. This is determined by several things. When you apply for a new credit card, your issuer will usually let you know what your limit is. If you’re approved for a credit limit of $2,000, you can spend up to $2,000 in purchases on your credit card.

How Are Credit Card Limits Determined?

Your credit limit is determined by the credit card issuer. They take into account factors such as your income and credit score. Usually, people with higher credit scores are approved for higher credit limits. Different people with the same credit card can have different credit limits.

Factors that determine your credit score Image

Debt vs. Income

Many credit card issuers evaluate your debt-to-income ratio when deciding what credit limit to offer you. This means that they measure your monthly debt payments against your wages and other income. A higher debt-to-income ratio may lead to a lower limit. This is because credit card issuers want to know you’re capable of paying off the debt you incur on your credit card.

Your First Credit Limit

If you’ve never had a credit card, then it may be a while until you’re approved for a high limit. Since you don’t have a credit history, credit card issuers aren’t sure how you’ll behave with the credit card they give you. They have no way of knowing whether you’ll rack up a huge balance and never pay it back, or if you’ll pay in full each month.

Because of this, issuers won’t usually offer big limits to people with no credit. If you’re applying for your first credit card, don’t be surprised if your limit is only $100.

If you’re offered a small credit limit, is it worth it? The answer is yes. If you use it for small purchases each month and pay it off on time, then this will help you establish positive credit. A small limit allows you to get used to handling credit responsibly with little risk to the lender.

If you consistently use your card responsibly, you may be able to ask for a credit limit increase or apply for a new card that has a higher limit.

What Is a Good Credit Limit?

This is a difficult question to answer because it depends on your needs and the purpose of the credit card. If you have a low credit score, then it’s highly unlikely that you’ll be able to get a high credit limit.

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The average credit card limit as of 2016 was $8,071. If you have a higher credit score, you may be able to get a line of credit that’s $10,000 or more.

Limits are different for each credit card issuer because they have different lending criteria. If you have credit cards from different banks, they’ll probably have different limits.

Increasing Your Credit Limit

You can get a credit limit increase. Your credit card issuer wants to keep your business, so if they’re able to give you a credit limit increase, they will in order to keep you using their services.

The key to getting approved for a higher limit is using your card responsibly. If you consistently make your payments on time each month and keep your utilization low, then the credit card issuer may approve your request. But remember to allow six to 12 months before asking. Your issuer probably won’t raise your limit after just one or two months of the account being open, or if you’ve been making your payments late. Remember that requesting an increase also causes a hard inquiry, so you’ll want to be strategic about when you ask for one.

Some credit card issuers will actively increase your limit. They’ll review your account history and see if you’re eligible for an increase. Sometimes, they’ll ask you to update your income. This isn’t required, but if you’ve gotten a raise recently, you can provide that information and the issuer may increase your limit. When an issuer reviews your account like this, it does not cause a hard inquiry because you didn’t make a request for them to review the account.

When Do You Find Out What Your Limit Is?

This can vary from issuer to issuer. Some cards, usually the ones which have a predetermined limit, will tell you as soon as you find out whether or not you’ve been approved. Other cards will approve you before calculating. You will either find out at the same time you find out your application has been approved, or the limit may come with the card in the mail.

Credit Utilization

Credit utilization is how much credit is available to you that you’re using. For instance, if you have a $20,000 limit on your credit card with a $5,000 balance, your utilization is 25%. This is important because this makes up 30% of your credit score. If you have a high utilization ratio, this will negatively impact your score. FICO suggests keeping your utilization under 30%.

You probably don’t want to use your entire credit limit. Not only will it hurt your credit score, but if you can’t pay off the balance in full, you’ll spend a lot of money on interest. Credit cards usually come with high-interest rates. This can lead to a lot of debt that’s difficult to pay off.

If you want to get a credit limit increase or get approved for another credit account, the lender will look at your utilization ratio when deciding whether or not to approve your application.

Credit Card Limits During the Coronavirus Crisis

It’s hard to find a facet of life that hasn’t been touched by the global pandemic. Corporations and individuals have seen huge financial repercussions from the coronavirus outbreak. To combat this, many financial institutions are working hard to ensure that individuals have the tools and support they need to stay afloat during these uncertain times. One of the support services that many are turning to is a credit limit increase.

Credit limit increases are more widely available during this time due to the current situation. If you’re looking for an increased credit line, we’ve rounded up what you need to know.

What Are Credit Card Issuers Doing to Help?

Some of the things that issuers are offering include credit limit increases, payment deferrals, payment plans, pauses on interest and waived fees. These support programs vary greatly depending on which card issuer you’re with. Work through your options with your issuer directly to hopefully prevent credit bureaus from receiving reports that could damage your credit.

Organizations That Announced Credit Line Increases

Some issuers have announced that they are offering credit limit increases in addition to other support. It’s likely that other issuers are offering limit increases to eligible customers; you should call your support line directly to hear your options.

In an effort to avoid scams, note that card issuers will never email or call you to ask for personal information (like your SSN, pin, name or account information). Never click links in an email you aren’t expecting or send personal information via email. If you are suspicious about a request, it’s best to contact the institution yourself through their official support number on the back of your card.

Steps You Should Take to Protect Your Credit

One of the best things you can do to protect your credit is calculate if you will need an extended credit line or other assistance. If you find that you’ll need support from your issuer, reach out to them as soon as possible. Issuers are reporting high call volumes, but it’s essential that you get through and formulate a viable plan.

Once you have a plan in place, you need to adhere to it. If you stray from your plan or skip reaching out completely, you may accrue credit penalties.

As mentioned above, there are also a number of scammers and hackers trying to capitalize on the panic that COVID-19 has caused. Don’t send personal information to unknown parties via email, text or phone call, as it could lead to fraudulent actions that could damage your score. Protecting yourself is getting harder as scammers imitate organizations and even create fake websites—for this reason, you should always reach out to the institution yourself.

To summarize, these are some of the most important things you can do to protect your credit:

  • Reach out to your issuer to explore different available support programs.
  • Stick to the plan you make with your issuer to avoid credit penalties.
  • Communicate with your issuer promptly if your circumstances change.
  • Scrutinize unexpected emails or calls and don’t share personal info.
  • Share account info only when you’ve reached out to your issuer yourself.
  • Keep tabs on your transaction history for any unauthorized charges.
  • Monitor your credit score for any unexpected movements.

The bottom line is that if you’re experiencing any difficulties making payments or are worried about accumulating debt and fees, you should reach out to your issuer directly so they can make arrangements with you based on your unique circumstances.

Communicating with your card issuer is an important thing to do if you ever need payment assistance. Many times, an assistance plan can be worked out.

Conclusion

Credit cards are great but you need to use them responsibly. Even if you get approved for a high credit limit, remember it’s not a good idea to spend all of it. Your credit score impacts how much of a credit limit you’re going to get. Don’t expect a $10,000 credit limit on your first credit card. You’ll need to work to make your payments on time and keep your utilization ratio low to be approved for a higher one.

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