A “credit limit” is the maximum amount that your credit card company will allow you to put on your credit card at one time. The difference between this and your outstanding balance is called your available credit. According to Investopedia, credit card companies tend to review and consider adjustments to credit limits about every six months. It is not uncommon for your credit limit to increase because of this reevaluation. Understanding how credit limits are determined and adjusted over time will help you be smart about how you use your credit cards and keep your score headed in the right direction.
What Determines Your Credit Limit?
Credit card companies use the underwriting process as a method to determine borrowers’ credit card limits. The formulas and analysis of underwriting can vary from company to company and are not released publically, says Investopedia. There are also credit cards that have predetermined credit limits, which banks would use as benchmarks to see what card(s) a potential borrower could or couldn’t be approved for.
When determining credit limits, banks, credit unions, or credit card companies look at a number of factors.
- Credit History – how well you’ve handled your credit in the past plays a big part in being approved for a credit card and determining how much available credit you’ll be given. Understanding how credit scores are calculated will help you to keep your credit in tip top shape.
- Income – Every line of credit is a risk to the lender, so they have to be confident it is a risk they’re willing to take. You will need to have an income to support the amount of credit you’re given so you’ll be able to pay it back comfortably.
- Employment History – Your income doesn’t only have to be above a certain amount, but it has to be consistent and reliable. If you’ve jumped around from job to job often, you may find it harder to get approved.
- Debt to Income (DTI) Ratio – Your current debt is also considered when setting your credit limit. If your current bills take up a lot of your income already, chances are your credit limit won’t be very high.
My Credit Card Limit Increased Without Me Asking
One day you go to pay your credit card bill or check in on your balance, and notice that your credit limit has increased! If this is your first credit card, it’s perfectly normal to have about a billion thoughts run through your mind. “My credit limit just increased, is that good?”, “How did my available credit go up without me asking?”, “Did someone hack my credit card?”. Well the good news is that in most cases this is perfectly normal and you have nothing to worry about.
Like we said earlier, every six months or so your credit account will be reviewed. The credit card company can choose one of four things to do:
- Increase your credit limit automatically
- Inform you that you qualify for a higher credit limit (leave it up to you to make the move)
- Leave your limit the same
- Decrease your credit limit
If your credit limit increases, or you get a notice that you have that option, it’s typically a solid indicator that you are in good standing with the company. Be cautious though, credit card companies don’t do this just because they’re feeling generous. They are businesses, and they want to make money. Increasing your credit limit is likely to mean more revenue for them in interest charges and more spending for you. However, in most cases a credit limit increase is a good thing, and can actually help your credit score.
If your credit limit hasn’t changed in a while, you shouldn’t be disappointed. Just keep doing what you’re doing and make the best effort to keep your accounts in good standing.
In the event that you see a credit limit decrease, you may want to stop and take a look at your spending habits. This typically means that you’ve fallen behind on payments or you often hit or exceed your current credit limit. By reducing this, the lender reduces their risk in maintaining the account. If you have any questions, it’s always best to call the credit card company and ask.
How do I Check What My Credit Limit Is?
Finding out what your credit limit is is an easy process. You should always be on top of your credit card accounts. Be sure you know what the due date, interest rate, credit limit, and any special rewards programs are so you can get the most out of your credit cards and avoid any costly missed payments.
The easiest way to check your credit limit and available credit is through the card’s app or website. Almost all banks, credit unions, or retail cards have some sort of online access nowadays. They’re usually very user friendly and tell you everything you need to know about your credit card.
You can also simply call the credit card company to check your credit limit or ask any questions. There should be a phone number on the back of the card that you can call. If you can’t find any of the information through the above channels, a detailed credit report can also give you information about your accounts.
Can I Request a Credit Limit Increase?
If you’re not getting the automatic increases that you want to see, you can contact your credit card company to ask for a credit increase. Just make sure that you’re doing this for the right reasons. You need to be able to afford your payments.
You shouldn’t be too quick to increase your credit limits if it’s not done automatically, especially at a young age. Teen Finance Tips recommends to take a look at managing your spending and budget differently if you’re finding that your credit limit isn’t enough. Sure, it’s a lot less fun – but as a teen you’re better off saving and getting started in investing your money. It sounds lame but you’ll thank yourself in the future.
Can I Deny a Credit Limit Increase?
In most cases you don’t want to decline an increase to your credit limit. If you keep your spending habits the same, this means lower credit utilization, which is the second most important factor in determining your credit score according to the FICO scoring model. On the other hand, if you know that the temptation of more spending power is something you’re not ready for yet, better safe than sorry. You are able to call the credit company and discuss reversing any recent credit limit boost.