What is a credit limit?

Depending on the type of account you open, a credit card can be a convenient way to pay for purchases, earn rewards and build credit history. But this flexible financing tool features certain limitations, and your credit limit is one of the most important. Your credit limit determines how much you can spend on the card, and getting too close to the max is bad for your credit score.

What is a credit limit and how does it work?

When a credit card issuer approves you for a new credit card, it places a cap on the maximum amount of money you can borrow on the account at once. This cap is your credit limit. 

You can spend up to the credit limit on your account during a given billing cycle. As you repay the money you borrow from your credit card issuer (either on your due date or throughout the month), you can make additional charges on your account again. However, if you reach the maximum credit limit on your account, your card issuer may deny additional charges until you pay down your account balance again. Also, maxing out your limit is bad for your credit score.

If you opt in for over-limit protection on your account, your card issuer might approve transactions that exceed the credit limit. However, you’ll typically have to pay an over-the-limit fee for this privilege — up to $25 for the first occurrence and up to $35 for each additional time you go over your credit limit during the next six months. 

Other potential consequences of going over your credit limit may include credit score damage or an increase in the interest rate on your account (aka penalty interest if the account is in default). 

How your credit limit is determined

Credit card issuers consider numerous factors when they set your credit limit. Many of these come from reviewing the details on your credit card application or credit report, such as your: 

• Income.
• Existing debts.
• Credit history.
• Credit score.
• Activity on other credit cards.

A good credit score could work in your favor when a credit card company sets your credit limit. When your score is 740 or higher, you’re typically considered to have excellent credit. Yet when it comes to income and debts — your debt-to-income or DTI ratio — a lower number is better.

Outside factors may also influence the credit limit that a card issuer assigns you when you open a new account. Economic conditions and pending legislation, for example, could impact a credit card company’s risk tolerance and affect overall customer credit limits across the board.

Wondering what a perfect credit score is and how to get one? Here’s just how high a credit score can go.

What is a good credit limit? 

Credit limits can vary by credit score, income, debts, age and other factors. So, the definition of a good credit limit can be different from one consumer to the next. 

In March 2022, the average credit limit for new consumer credit cards was $5,049, according to Equifax data. However, when you consider subprime credit cards (defined in this case as credit card accounts opened by consumers with VantageScore credit scores below 620), the average credit limit for the same time period was considerably lower — $865. At the same time, it’s possible for some consumers to receive credit limits that far exceed these averages. 

How your credit limit affects your credit score

The size of your credit limit has a significant influence on your credit utilization ratio. Credit utilization is a measurement of the percentage of your credit card limits in use, aka the “amounts owed” category  and counts for up to 30% of your FICO Score calculation. A lower credit utilization rate is better for your credit score. 

If you have a credit card with a $5,000 limit and you owe a $2,500 balance on the account, your credit utilization ratio is 50%. In other words, you’re utilizing 50% of your credit limit. At the same time, if you have a credit card with a $500 limit and you charge a $250 balance, that account would have a 50% utilization ratio. 

Utilization is calculated both on an individual card level and across all your credit card accounts as a whole. So, it’s possible to have low overall utilization but high utilization on a particular account.

When you have a higher credit limit on a credit card, it may be easier to maintain a low credit utilization rate. And since low credit utilization is better for your credit score, having credit cards with higher credit limits could work to your advantage where your credit score is concerned. 

Nonetheless, it’s important to pay off your full statement balance each month no matter the size of your credit limit. If you revolve a balance from month to month, you’ll incur interest charges (unless you’re taking advantage of a 0% APR promotional offer), regardless of how low or high your credit limit on the card is. Revolving a balance could also increase your credit utilization ratio and trigger a credit score drop as a result.  

Can you increase your credit limit?

If you’ve had your credit card for six months or more and feel like you’re ready to manage a larger credit line, you may wish to ask your credit card issuer for a credit limit increase. Depending on your credit card company, you might be able to request a higher credit limit online or you might need to call the phone number on the back of your credit card. 

Before you ask for a higher credit limit, consider paying down your credit card balance if possible. A lower credit utilization rate, especially on the account on which you’re seeking a credit limit increase, might improve your odds of a higher credit limit. On-time payments to your credit card issuer (and other creditors) are also essential. 

Keep in mind that your credit card issuer might perform a hard inquiry to determine whether you’re eligible for a credit limit increase. A hard inquiry has the potential to impact your credit score in a negative way. However, any negative impact on your credit score is typically minimal and short-lived since FICO scoring models only consider hard inquiries on your credit report for 12 months. 

Can you do anything about the effect of a hard inquiry? Here’s how long a hard inquiry stays on your credit report.