Facts about Credit Card Limits
Credit cards are a convenient way for you to buy goods and services. However, a credit card does not mean that you can spend unlimited amounts. Credit cards typically have a credit limit or credit line. This is the maximum credit that a credit card issuer can extend to a card member. Any further attempts to purchase with the card by a cardmember will be rejected once they reach that limit.
It is important to understand the workings of your credit limit and how it could impact your credit score.
1. Factors that are frequently considered when setting credit card limits
Credit card companies consider multiple factors when determining your credit limit, such as:
- Credit card issuers want to see proof that you are earning enough money to pay regular payments for any purchases you make using a card they might issue. You may be eligible for a greater credit limit if you have a higher income.
- Duration of Employment: Card issuers are often interested in your history of being consistently employed. This is a sign that you have financial stability and security. This could make you more appealing to their credit card company than someone who has a less stable or longer track record.
- Credit history: Credit card issuers typically pull your credit reports when you apply for a new credit account. This is to check how you have managed credit in the past. A positive payment history may make it more likely that the issuer will grant you a greater credit limit than if you have not been able to pay on time in the past.
- Credit Utilization: This important measure is usually expressed as a ratio. It shows how much revolving debt you are using relative to the total revolving funds you have. Card issuers generally view a lower credit utilization ratio as more favorable than one with a higher.
- The Debt-to-Income Ratio is calculated by taking your monthly gross income and dividing it by your monthly debt. This helps potential creditors get a better understanding of your monthly debt and how much you earn. A lower credit utilization ratio is more appealing to creditors than a higher one, just like credit utilization ratio.
2. You can easily find your credit card limit
Your credit limit should be stated clearly in your credit agreement when you receive your first credit card. You can find your credit limit in your credit card agreement if you don’t have it. This is the amount that you can charge to your credit card, and the total credit you have.
3. Your credit limit can affect your credit utilization and credit score
The credit utilization ratio is calculated by the sum of all your revolving credit lines. If that sum changes, the ratio can also change. If your credit limit is $2,500 and your balance is $250, then your credit utilization ratio for that card would be 10%. Your total credit utilization ratio is 20% of your outstanding balances on all your revolving credit cards are $3,000 and your credit lines for those accounts total $15,000
The credit utilization ratio is one factor that can be used to determine credit score. Expert recommend keeping it under 30%. Your credit utilization ratio will increase the closer you are to your credit limit. This could affect your total utilization percentage. A decrease in your total credit utilization could have a negative impact on your credit score.
4. Your Credit Card Issuer May Lower Your Credit Card Limit
The credit card issuer will determine your credit limit when you open a credit account. The limit doesn’t have to stay the same throughout the life of your account. Your card issuer has the right to lower your credit limit if it is within your cardholder agreement and allowed by law.
It could be for many reasons, not just one:
- You haven’t been making on-time, regular payments to the account
- You are spending more than normal
- Your income has been decreased
- Customers are more likely to default due to economic risks.
