What Is a Credit Limit?
Written by: Jacob S.
Published on:
A credit limit is the maximum amount a lender allows you to spend on a revolving credit account, such as a credit card or line of credit. These types of accounts give you flexibility: you can borrow, repay, and borrow again—up to your limit—as often as you need. It's a dynamic form of credit that supports your spending needs while helping build your financial profile.
Understanding how credit limits work is essential to managing your finances wisely and keeping your credit score in good shape. Let’s break it down.
Key Terms to Know About Your Credit Limit
When reviewing your credit card statement or credit account dashboard, you'll typically see three important figures:
1. Credit Limit
This is the maximum amount of money you can borrow on a revolving credit account. It’s set by your lender and won’t change unless they increase or decrease it. The credit limit doesn’t fluctuate based on your spending or repayment. Instead, it simply represents the ceiling of your borrowing power on that account.
Example: If your credit limit is $5,000, you can borrow up to $5,000 at any time. You can pay off part or all of your balance and borrow again—just never exceeding the $5,000 total.
2. Available Credit
Your available credit is the portion of your credit limit that you haven’t used yet. It's calculated as:
Credit Limit – Outstanding Balance = Available Credit
This number changes constantly as you make purchases and payments. If your credit card is unused, your available credit equals your full credit limit.
3. Outstanding Balance
This is the amount you currently owe. It includes purchases, interest charges, fees, and any other amounts that haven’t been paid back. Your outstanding balance is what lenders use to calculate the interest due if you carry a balance past your due date.
How Do Lenders Determine Your Credit Limit?
Every lender has a unique process, but here are the most common factors used to decide how much credit to extend:
Credit Score
A higher score usually leads to a higher limit. Lenders rely on your credit score to evaluate your creditworthiness based on your past borrowing and repayment behavior.
Payment History
Lenders look at how reliably you’ve paid past debts. A strong history of on-time payments signals you’re responsible with credit, often leading to better credit limit offers.
Income and Financial Situation
Lenders want to know that you have the means to repay your debt. They review your income, expenses, and overall financial obligations to assess your repayment capacity.
Your Relationship with the Lender
If you’ve been with a bank or lender for a long time and have shown responsible financial behavior, they may offer you higher limits as a reward for loyalty and low risk.
Collateral (for Secured Cards)
If you’re using a secured credit card, your credit limit might be equal to the amount of your deposit. This acts as a safety net for the lender in case you default.
How Credit Limits Affect Your Credit Score
Your credit limit directly impacts your credit utilization rate, which is a key factor in your credit score. Here's how it works:
Credit Utilization Rate = Outstanding Balance ÷ Credit Limit
For example, if you have a $1,500 balance on a $5,000 limit, your utilization rate is 30%. The general rule? Keep your utilization rate below 30%—lower is even better. This shows lenders you’re using credit responsibly and not overextending yourself.
Pro Tip: You can improve your utilization rate by either paying down your balance or requesting a credit limit increase—just be sure you don’t increase your spending along with it.
How to Request a Credit Limit Increase
Looking to expand your borrowing power? Here are some valid reasons lenders might approve a higher limit:
-
Your income has increased—and you’ve provided proof.
-
Your debt levels have dropped, improving your financial health.
-
Your credit score has improved—showing you're more creditworthy now.
Keep in mind: Requesting a credit limit increase may result in a hard inquiry on your credit report, which could temporarily lower your score.
What About No-Limit Credit Accounts?
Some elite credit cards are advertised as having "no pre-set spending limit." While this may sound like unlimited spending power, these accounts still have internal limits that adjust based on your income, credit history, and spending habits. They just don’t display a fixed number.
True unlimited credit lines are rare and typically reserved for ultra-high-net-worth individuals through invitation-only programs.
Why Understanding Credit Limits Matters
Knowing your credit limit—and how it relates to your available credit and balance—is key to maintaining healthy credit habits. It empowers you to:
-
Make informed spending decisions
-
Avoid unnecessary interest charges
-
Improve your credit score
-
Position yourself for better financial opportunities
Credit is a tool. When used responsibly, it can open doors to everything from buying a home to starting a business. Understanding the basics, like your credit limit, is a great step toward long-term financial success.
