April 20, 2021 |6 min read
When you’re approved for a credit card account, the card issuer grants you a credit limit. This is the maximum amount you can spend with your credit card.
Credit limits are based on several factors and vary by credit card issuer and cardholder. But generally, a good credit limit is simply one that meets your needs. Read on to learn more about how credit limits are determined and how you can increase yours.
How are credit limits determined?
After a credit card issuer reviews your application, they’ll decide whether you’re approved. They’ll also consider several factors to determine how much you can borrow. Ultimately, card issuers want to be sure you’re likely to repay your balance.
To come up with your credit limit, an issuer may consider a number of factors:
- Annual income: Card issuers are required to consider your ability to pay before extending credit to you. Generally, they want to know whether you make enough money to cover your monthly bill. Depending on circ*mstances, a person with a high income could receive a higher credit limit compared to someone who earns less.
- Credit score: Your credit score measures how you’ve handled money you’ve borrowed in the past. And that can help card issuers predict whether you’ll make your payments on time in the future. Generally, credit card issuers grant higher credit limits to people with higher credit scores.
- Monthly obligations: Credit card issuers may ask about your monthly expenses, such as rent and loan payments, to help them check your ability to pay your credit card bill. If you have other debt that chips away at your income, then you might receive a lower credit limit compared to someone with fewer monthly obligations.
- Employment status: Some credit card issuers ask whether you’re employed to help them determine your ability to make payments. But you don’t necessarily need a job to qualify for a credit card. You can tell the card issuer you receive income from other sources. Those may include unemployment benefits or income your spouse earns.
How credit limit increases work
There are two main ways your credit limit could increase:
- Lender-initiated increase: Some credit companies regularly review credit card accounts and automatically grant credit limit increases. The details vary with every card issuer’s credit policies. For example, if you have a Capital One card and are given a credit limit increase, it’s an indication you’ve used your credit responsibly. Or that a higher credit limit could help you meet your spending needs while still using your credit responsibly. And if you receive a credit limit increase you don’t want, you can simply decline it.
- Customer-initiated increase: You can also contact your card issuer to request a credit limit increase. Lenders may have different criteria. But Capital One requires your current total annual income, employment status, and monthly mortgage or rent payment. That information, along with other risk factors, helps determine whether to approve or decline the request.
Requesting a credit limit increase may or may not affect your credit scores. This usually depends on whether the card issuer pulls your credit report to evaluate your request.
If the card issuer performs a hard inquiry, it may lower your credit score. The effect is usually small, but you may want to ask your issuer about their procedures before requesting a credit limit increase.
Getting a good credit limit
If your credit limit isn’t as high as you want it to be, there are ways you can help improve your odds for an increase:
- Keep your information up to date. Get into the habit of updating your personal and financial details with the card issuer. Why? Credit card companies are required by law to use up-to-date income data when changing a credit limit. So if your income increases, the card issuer may use that information to grant you a higher credit limit.
- Make timely payments. Paying your credit card bill on time every month is a great way to show responsible credit use. If you have trouble hitting this goal, consider setting up automatic payments or electronic reminders to help you avoid missing payments.
- Consider paying off your balance every month. Part of your credit score is based on your credit utilization ratio, or how much credit you use. Using less credit tells the card issuer you’re not overextended, which is a good sign. It may help you qualify for a bigger credit limit.
- Monitor your credit. Your credit score is based on the information in your credit reports. Regularly monitoring your credit can help you catch errors or even signs of identity theft. You can use a tool like CreditWise from Capital One to monitor your TransUnion® VantageScore® 3.0 credit score for free—without hurting your score. Plus, you don’t need to be a Capital One customer to use it. You can also go to AnnualCreditReport.com to get free copies of your credit reports from each of the three major creditbureaus.
Ultimately, a good credit limit is different for everyone. But no matter what you’re approved for, always remember to use credit responsibly and spend within your means.
