How is your credit limit determined?
The credit card issuer determines your credit limit based on several factors, including:
- Credit history
- Credit limits on all other cards you have
As you might expect, good credit, high income, and low spending are all factors that can help you get a higher limit.
If you request a credit limit increase, the card issuer will also review your account history. Including:
- Your one-time payment record
- How often do you use your card
- How much of your credit limit are you using
Each credit card company has its own method of calculating credit limits. Since these methods are private, there is no way of knowing exactly how much a credit card company will offer until you apply for a card.
The average credit card limit is $ 31,015 in 2019. However, it varies widely from generation to generation. Gen Z has the lowest average credit limit at $ 8,062. The average rises to a peak with Baby Boomers, who have an average credit limit of $ 39,919.
Does the request for a credit increase affect my credit rating?
Asking for a credit increase can impact your credit score, but only if the card issuer extracts your credit report. If the request is likely to affect your credit, the card issuer will let you know, whether you made the request over the phone or online.
When a credit card company pulls your credit report, it’s called a serious credit investigation. This usually results in a small drop in your credit score. For most consumers, a single serious request takes less than five points off their FICO® score, the most widely used type of credit score.
Not all card issuers get your credit report when you request an increase in your credit card limit. If not, your request will have no impact on your credit.
Pros and Cons of a Higher Credit Limit
A higher credit limit has its advantages, but there are also potential disadvantages.
More purchasing power: With a higher credit limit, you can use your card more without risking maximizing it. There are several situations where this can be useful:
- You put all of your purchases on your credit card to maximize rewards.
- You want to be prepared if you have major emergency expenses.
- You want to refinance credit card debt with a balance transfer, but you need additional credit to cover the balances you plan to transfer.
Can increase your credit score: You could increase your credit score by increasing your credit limit. One of the most important factors in your credit rating is your credit utilization rate, or how close your credit limits are. Less use of credit benefits your credit score. The sweet spot is anywhere at or below 20%. (As in: You only used 20% of your credit limit.)
Let’s say you have a credit card with a balance of $ 500 and a limit of $ 1,000. You are using half of your available credit, so your credit utilization rate would be 50%, which would likely affect your credit score. You ask for an increase in your credit limit and the card issuer raises it to $ 2,000. Now you still have a balance of $ 500, but your limit is higher, so your credit utilization rate has come down to 25%. It’s not quite perfect, but it’s way better than 50%, and your credit score would benefit.
Increased risk of credit card debt: A higher credit limit is more money than you could spend. If you’re not careful, it’s easy to overdo it and end up with credit card debt. This is more likely if you’ve had issues with overspending, or have found yourself near your credit limit frequently in the past.
The best way to avoid this is to budget and track your spending. You should also aim to pay off your entire credit card bill each month. When you never have a balance, you won’t end up with credit card debt or interest charges. Use our credit card interest calculator to see how quickly interest can accumulate if you keep a balance.
May affect future credit card applications: When you apply for a credit card, the card issuer examines the current cards on your credit report and their respective credit limits. A card issuer may not want to approve you for a card if they determine that you already have a large amount of credit available. Therefore, it is possible that an increase in the credit limit will reduce your chances of being approved for future applications. However, it all depends on the number of credit cards you already have and your lines of credit.
Maybe your credit score: As mentioned above, some card issuers pull your credit report when you request a credit limit increase. This serious credit investigation can lead to a small temporary drop in your credit rating. That’s not a big deal, as it will likely only lower your score by a few points. Still, this is a minor drawback that you should be aware of.
Often times, credit limit increases happen automatically if you are a responsible cardholder. But you can also apply for them yourself if you want a higher credit limit. It’s a simple process, and you could get an increase in your line of credit in minutes. If that doesn’t work and you get turned down, you still have the option to browse the best credit cards and open a new one to get more credit this way.
Still have questions ?
Here are some more questions we answered: