Understanding credit limits
A credit limit is the maximum amount of credit you can spend on your credit card — it's the total amount you can borrow.
Your credit limit and available credit aren’t the same. Available credit represents how much credit you can still use on your card as of today’s date. Your available credit limit considers both your posted and pending transactions. If you spend more than your available credit, over limit fees will apply.
How your credit limit is determined
Your credit limit is based on different factors like your credit score, income, debt, length of credit history, rate of application for other forms of credit and more.
Your credit score is probably the most important factor in determining your credit limit because:
- Someone with a strong credit score represents a low-risk opportunity for the bank. They’re rewarded with a higher credit limit because they’re more likely to pay their bills on time.
- Someone with a weak credit score represents more risk for the bank. They’ll receive a lower credit limit because they may have a less consistent history of paying off debt.
How your credit limit affects your credit score
If you use your credit card the right way, your credit limit, even if it’s low, can still benefit your credit score. Consider your utilization ratio — the amount of credit you use divided by your card’s credit limit.
A high utilization rate suggests you may have a hard time paying off your credit card balance. A high ratio may lower your credit score and make you a possible risk to future lenders. You should aim to have a credit utilization ratio of 30% or less.
Don’t max out your cards. Carrying smaller balances, that you can comfortably pay off each month, shows you’re responsible with your money, which boosts your credit score. As time goes on and you use your credit wisely, you may be eligible for an increase in your credit limit.
Is a higher or lower credit limit better?
A higher credit limit gives you more flexibility when it comes to using your account. But it can also make it easy to overspend and rack up more debt.
A low credit limit can stop you from spending beyond your means but if you use up most of your credit limit on large purchases, your spending could negatively affect your credit score. As a rule of thumb, don’t spend more than 30% of your credit limit.
Whether you have a higher or lower credit limit, you should use your credit card responsibly. Don’t spend more than you can afford to pay, pay off the whole balance in full by the payment due date and don’t skip payments.