What’s a credit limit?

You’ve decided to apply for a credit card, you’ve gone through the application process and got approved — congratulations! A few weeks later, you receive your card in the mail, but you notice the maximum amount you’re allowed to charge to the account is lower than you expected and you’re not sure why. In this article we’ll tell you everything you need to know about credit limits and how they’re determined.

A credit limit is the maximum amount of credit you can spend on your credit card. In other words, it's the total amount you can borrow. This limit is set by the bank for the account.

Credit limit versus available credit

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. For example, if your credit limit is $5,000 and your current balance and pending transactions equals $1,000, your available credit would be $4,000. If you spend more than your available credit, over limit fees will apply.

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.

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 harder time paying off your credit card balance. This 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.

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, 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.

Can you exceed your credit limit?

Whether you can go over your credit limit or not depends on the card issuer. Some issuers may decline a transaction if it will put you over your limit. However, others may approve the transaction, but it may come with an over limit fee.

Other potential consequences of exceeding your limit may include a reduction to your credit limit or even having your account closed. Be sure to review the terms of your credit card agreement to understand your issuer's rules on going over your credit limit.