Credit Limits

Almost all credit cards have a limit, which is the maximum balance that you can have on the card. If you attempt to go above that amount, your purchase will usually be declined. A key part of managing your credit is understanding limits, how they work, and what you can do with them.

In a prior post, I explained that one component of your credit score is your utilization. The specific advice I gave was to keep your individual and overall utilization under 30%. That means if you have one card with a $3,000 limit and another card with a $6,000 limit, you don’t want to utilize more than 30% x ($3,000 + $6,000) = $2,700 in credit across both cards: specifically,  30% x $3,000 = $900 in credit on the first card and 30% x $6,000 = $1,800 on the second card.

How much credit you utilize is calculated based on when your statement closes, which is typically once a month. If you need to make a huge purchase and max out your credit limit, that won’t affect your credit score unless you fail to get below 30% utilization prior to the statement closing. If you do get caught using more than 30% of your limit on any individual card or overall, your credit score will drop, but if you get below that limit your score will rebound fairly quickly.

Now, let’s talk more about credit limits themselves.

When you’re approved for a credit card, you’ll be notified of the limit. The limit granted to you will vary based on such factors as your credit score, your history (if any) with the creditor, your (usually self-reported) income, the particular card, and the peculiarities of the individual creditor. It’s almost always advantageous to have a larger credit limit, and obtaining higher limits may be easy or hard depending upon these factors.

Fortunately, there are a variety of things you can do with respect to your credit limits. First, you can almost always contact the creditor and close the card. This obviously removes the credit limit entirely and has other negative effects as I outlined in previous posts. You can also ask that they reduce your limit and this is an easy process. There are not many reasons to ever do either of these things.

Sometimes creditors will increase the limit on your card automatically based on your history, but you can also ask to have your credit limit increased. If you can have your credit limit increased, it’s usually a good idea to do so, although be forewarned that when doing so, a hard pull may occur. It is always in your best interest to double and triple check by reading the fine print or contacting customer service to see if a hard pull will occur. Unless you have a compelling reason to get a credit limit increase, it’s usually not worth the hard pull.

One other thing to note with credit limit increases is that you may be asked why you want the increase and to provide proof of income and your monthly expenses. If these amounts are large, or significantly different from what you’ve told them before, they may require actual documentation to process the request. Be sure to be prepared with questions you have and information they might request from you.

If you have multiple cards with the same creditor, you may be able to transfer limits from one card to another. This won’t really affect your credit score or report, but there are several reasons why one might want to do it.

First, suppose you have two cards with the same bank. One gives you nice rewards when you use it for travel and has a limit of $1,000, while another card has a $10,000 limit and you use for general purchases due to a good cashback rate. Unfortunately, you need to buy $2,000 in plane tickets, so you can’t put it all on the travel card. You can call the bank and ask them to move some of your credit limit from the general card to the travel card.

Second, suppose one of your accounts is to be closed, for example because it has an annual fee and you don’t use the card much or if the creditor closes it due to lack of use. You should ask to have the credit limit transferred to another card that you have with the same creditor. This will keep your overall credit limit the same, thus keeping your utilization rate at the same level.

Lastly, in some cases you might open a card and be given such a small credit limit that the card is effectively useless. Banks monitor the overall amount of credit that they give each customer and if you’re near that, a new card may have a very small credit limit. This has happened to me more than once and in every instance, I’ve reallocated my limit from one card to another without issue.

A nice perk related to transferring part of your credit limit from one card to another is that having a high credit limit on one card can influence the credit limits of cards you get from other creditors in the future. More than once in the past I’ve gotten a new credit card and they check my credit report, find out which card has the highest limit, and match that limit. Again, having a higher limit is not only more useful, but results in lower utilization, which is good for your credit score.

As you can see, credit limits are based on a variety of factors, but fortunately they’re not set in stone. As your credit portfolio grows, increasing or reallocating your credit limit can be a useful tool for keeping your credit score high and getting the most out of your credit cards.