What You Need To Know About Credit Card Limits

There are times when taking it to the limit is a good thing — like when you’re racing in the Indy500, for instance, or finishing your first marathon. When it comes to credit card limits, the best policy is to keep your distance.

How Limits Are Set

A credit limit is the maximum dollar amount you’re allowed to charge to a card, as set by your credit card company. Some credit cards come with preset credit limits for everyone that is approved. For many cards though, your limit depends on your creditworthiness and factors such as your credit history, FICO score, and income level.

A 2015 Experian analysis showed that the average U.S. credit card limit varies widely by credit score. Limits start around $500 for cardholders with a 300-499 FICO score, grow to an average $2,277 for those with a 601-660 score and climb to an average of more than $9,500 for users with a 781-850 score.

Why Your Credit Limit Matters

It’s a good idea to monitor to your credit card limits. There are obvious reasons, like avoiding an embarrassing card decline, and less obvious reasons, such as determining your credit utilization ratio. A credit utilization ratio is the amount of credit you’re currently using compared to the amount of credit available to you. This ratio is a factor in determining your overall credit score.

It’s recommended to keep your credit utilization ratio at 30 percent or less. For instance, if you have a credit card with a $7,500 limit, and your balance is $2,250, your credit utilization is at 30 percent. If you have a card with a $10,000 limit and your balance is $2,000, you’re at a 20 percent utilization rate.

Your ratio is usually based on total outstanding balances vs. total credit limit across all the cards in your name. Exceeding 30 percent on even one card could hurt your score, even if you regularly pay your balance in full.

The best practice is to keep all balances below 30 percent. Another way to improve your credit utilization ratio is to raise your credit limit — without raising your spending.

How to Increase Your Credit Limit

Using all your available credit is not a good way to get your limit increased. In fact, it’s the cardholders who make a habit of keeping their credit limits in check that are typically granted automatic increases. Credit card companies track customer spending and adjust limits up (and occasionally down) depending on spending and payment habits.

If you haven’t noticed an increase in your credit limit on a card you’ve had for at least six months, consider asking for an increase if you need one. With most cards, you can call customer service to ask, or you may be able to complete a request online.

Before you pick up the phone, make sure you’re in a good spot to ask for an increase: you make payments on time, haven’t maxed out your current limit, have a good credit score, and are a customer in good standing. If you’ve recently gotten a raise or there is another factor that positively impacts your ability to pay, bring that up in the conversation, too.

You might want to hold the line if you’ve recently asked for increased credit with another lender or have completed other credit applications. If you’ve decreased your spending power by taking a lower-paying job or your credit score is only so-so, your chances of being granted an increase are also lower.

If you think you’re entitled to a credit limit increase but are denied, ask your credit card company why. They may see something in your credit card report you aren’t aware of that impacted their decision, including fraudulent activity. As always, if you see an error on your credit report, take immediate steps to correct it.

Keep in mind that requesting a credit limit increase could initiate a hard inquiry to your credit report. That could mean a short-term loss in points on your credit score, but if you practice good credit habits your score should quickly recover.

What to Do After a Limit Increase

If you’ve requested an increase and received one, be sure to make the most of it. That doesn’t mean it’s time to rack up a higher balance; rather, figure out what balance keeps your credit utilization rate under 30 percent and stay below that number. Don’t spend more money just because you can. Restrict your spending to what you can afford to pay back and keep making your payments on time and, if possible, in full.