How Your Credit Limit is Determined

There are two main factors lenders look at to set your credit limit: your credit score and income level.

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By Bethy Hardeman

The number that tells you how much you can charge on your credit card is known as your credit limit. It's a dollar amount that's set by your lender when you get approved for a new line of credit. But just how do lenders set these limits? For the most part, there are two primary factors that most lenders look at in order to set your initial credit limit: your credit score and income level.

1. Credit score

Your credit score is composed of six factors, in order of significance:
  • Credit card utilization rate: This is the overall percentage of credit limits you're using (calculate by dividing your total credit card balances by your total credit card limits). Typically, the lower this percentage, the higher your credit score.
  • On-time payment history: This shows how often you've made your bill payments on time. The closer this number is to 100 percent, the higher your credit score.
  • Age of credit history: This shows how long you've been building credit. In most scoring models, it takes into account both open and closed accounts. The longer your credit history, the more easily lenders can assess your creditworthiness.
  • Total number of accounts: This is the number of credit accounts you have on your credit report, including credit cards, mortgages, auto loans, student loans and personal loans.
  • Number of hard credit inquiries: Hard inquiries are initiated on your credit report every time you apply for credit. They typically fall off your report after two years. Too many recent hard credit inquiries can signify that you're desperate for credit.
  • Number of derogatory marks: Derogatory marks include accounts in collections, bankruptcies, civil judgments and tax liens. As one derogatory mark can significantly decrease your credit score, it's best to avoid them.
All of those factors boil down into a three-digit number (your credit score) that represents your creditworthiness and puts you into a credit rating category: poor, fair, good or excellent. Many credit cards have minimum credit score requirements, though these aren't always published by the lender.

2. Personal income

Your income also impacts your credit limit. Since your credit limit essentially tells you how much you can charge to your card, it's important for your lender to know you have the income to cover anything you charge.

Since 2009's Credit CARD Act, it was a requirement that applicants report individual income (instead of household income). This change was originally made to keep young adults from racking up credit card debt they couldn't pay off. However, it unintentionally kept stay-at-home spouses and partners from qualifying for credit. The Consumer Financial Protection Bureau lifted the restriction last month, and applicants can once again report household income.

Other things lenders consider:
  • Repayment history: Your credit score and income level don't always tell the full story; lenders are also interested in other factors. One factor is your repayment history. This shows how often you've paid back your debts on time. Credit card lenders want to see that you've been responsible with your other lines of credit in order to set the limit on your new line.
  • Debt-to-income ratio: Lenders typically take into account your debt-to-income –- or DTI -– ratio. You may have a high income, but if you're also in a lot of debt, you may not be able to pay off a maxed-out credit card. As a result, lenders may not want to risk giving you a high credit limit.
Your credit limit can change

Maybe you've been given a low credit limit to start. Don't fret! Your credit limit isn't set in stone. In fact, most credit card issuers will re-evaluate you as a customer every six months. If you've used your credit card responsibly, your issuer may decide to increase your limit.

On the flip side, if you've made some late payments or missed a bill, your issuer may find that reason enough to decrease your credit limit. A lower credit limit could inflate your credit utilization rate, one of the most important factors of your credit score.

Stay on track

After you get approved for a new credit card, use it wisely. Make at least the minimum payment on time each month (more if you can, to save on interest). And keep your credit utilization to less than 30 percent (but more than 0 percent) for a healthy credit score.

In no time, you should see your good habits pay off credit-wise.

Bethy Hardeman writes about personal finance, credit and the economy for CreditKarma.com, a free credit monitoring website that helps more than 20 million people access their credit score for free.


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20 Comments

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Mark

Cash is King! Cancel and destroy your credit cards. They are a cancer!

December 08 2013 at 10:07 PM Report abuse +1 rate up rate down Reply
dd1820

Hmm, of course they dont tell you that they will CANCEL your card in a nano second too if you dont USE their card.........moron banks get it BOTH ways. If they cant SCREW you with an interest rate and you use the card like I did forf major purchases or emergency only, they shut you down. I went to use a card three months ago with a 30,000.00 limit. I wanted to buy new cabinets and appliances for my new home. Card denied.......I KNEW I hadnt used up my avaible credit so WHAT gives??? So as Im standing there embarrassed because my purchase didnt go through we call the card company and they just say oh year you havent used it in 39 moths so we canceled your account.....................WTF thanks for NOTHING CITIBANK....................you guys SUUUUUUUUUUUUUUUCK.

December 08 2013 at 10:26 AM Report abuse +2 rate up rate down Reply
k4jlp

If you folks only knew how bad the cards are stacked against the middle class....how easy it is to be tripped up by missing ONE payment or having a medical bill that your insurance should have paid listed under \"collections\" for 7 years. I feel that if you have paid the debt, it should be removed from your credit report in 1 year NOT 7 YEARS. The \"game\" rules have been set by the people who PROFIT from your slip ups....

December 08 2013 at 8:55 AM Report abuse +1 rate up rate down Reply
propickup

are you kidding they can't wait to give you credit. They want that interest.

December 06 2013 at 1:10 AM Report abuse +2 rate up rate down Reply
photoguywm

Hey Banks !!! Did you ever figure out how we found out that you launder illigal drug money ?
Did you ever figure out how we found out you stole farm land from US Asian Citizens during
the second world war by sending them to camps ? Have you figured out how we now know
how you have brought the Republic of America into bankruptcy ? We now know who the real
terrorist are......They are the ones issuing the Credit Cards.

December 05 2013 at 11:37 PM Report abuse +2 rate up rate down Reply
William

Yes, if you have a credit card it's best to pay it off every month. What if you can't pay it in full every month? The best thing to do then, is find one with the lowest interest rate you can. I've seen some pretty bad banks that charge fees just to open an account for people with bad credit. Fees that can equal up to $200!! That's just for a $300 limit, and after all the fees, there's only $100 left. No freakin way would I EVER go for that BS, plus the interest is 36% too, and there's a monthly service fee!! People with bad credit, get a secured card, I've seen banks with 14.9% interest and a low $19 annual fee. If you're credit is bad, I'd recommend Capital One, they usually approve you if your credit isn't way way bad. The security deposit can vary too, so check them out.

December 05 2013 at 8:15 PM Report abuse rate up rate down Reply
1 reply to William's comment
Valerie

@ William: Actually, the "best thing to do" is to avoid being irresponsible and spending like crazy on credit to begin with.

As much as I dislike the banksters in general --- it certainly isn't the fault of any bank that a lot of people have created bad credit history. That situation is due to personal choice by individuals. Issuing credit cards to people, who have already proven that they are immature and irresponsible with money is a bad business decision. (I'm sure you wouldn't, personally, loan money to someone that you knew didn't have the ability to manage their money responsibly. So, why do you think banks should do that??)

9 times out of 10, the bad credit tracks back to "shopping till you drop". People want it ALL --- and they want it all RIGHT NOW. So, they buy more house than they can afford, a new car every couple of years, and they also rack up big balances on credit cards.

Saving up to get what you want seems to be nearly a lost art. But, it is something that we all need to learn how to do. No one can get away with living their life on credit indefinitely. Eventually, that house of cards is going to fall down. Learn how to save and invest. Forget about learning how to work the credit system. All living on credit will do is give you a life that resembles that of a hamster running on a wheel.

December 09 2013 at 1:23 AM Report abuse rate up rate down Reply
k4jlp

Banks are drooling at the mouth because they know all the dings on millions of credit reports due to unpaid medical bills because of the increased deductables on health insurance people cannot pay. Thats what the banks, congress and the wonderful folks at the federal reserve want. the lower YOUR SCORE means the MORE banks make in higher interest payments. Also, don't you think the 3 Bureaus keeping a "paid" collection your your record for 7 YEARS is a tad to long?

December 05 2013 at 5:23 PM Report abuse +2 rate up rate down Reply
scottee

what is Washington's credit limit?

December 05 2013 at 4:24 PM Report abuse +3 rate up rate down Reply
2 replies to scottee's comment
vlady1000

Better yet, what is their DTI?

December 06 2013 at 8:45 PM Report abuse rate up rate down Reply
Mark

Apparently it is "the sky". If they run over that, outer space will be their new limit, and it is boundless.

December 08 2013 at 10:12 PM Report abuse rate up rate down Reply
dltanner7

I've been with my Credit Union for 25 years, after one gig from a doctor bill, they jumped up a car loan by 2 points from my last car loan. I bought a new car this week, and got 3 points less than what my Credit Union was offering through the car company. If they think they got you they will charge whatever they think they can get away with.

December 05 2013 at 3:47 PM Report abuse +2 rate up rate down Reply
justus145

Unfortunately mily469 your credit score would be very low and you would be paying more for certain things - insurances for one. Responsibility is key, i.e., good debt/bad debt.

December 05 2013 at 3:34 PM Report abuse rate up rate down Reply
1 reply to justus145's comment
Bethy Hardeman

Completely agree! Also - I've gotten quite a few free flights and some free cash using my cards, and I never pay any interest bc I pay them off monthly. Gotta game that system! ;)

December 05 2013 at 3:40 PM Report abuse -1 rate up rate down Reply