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What Is a Credit Limit? How Do Credit Limits Work?

What Is a Credit Limit? How Do Credit Limits Work?
Jason Steele

Jason Steele

Updated January 19, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Understanding how credit limits work isn’t the easiest thing. Credit card issuers don’t tend to explain in great detail the process they use to determine how much you can borrow with your account. Nevertheless, if you use credit cards, it’s important to know how credit card limits work. Read on for more information, including how credit limits are determined and when a credit card limit resets.

What Are Credit Limits?

A credit limit is the total amount that you are allowed to charge to your credit card. This includes not just purchases, but your entire outstanding balance as well as balance transfers, interest charges and fees, such as annual fees and late fees. Your credit card issuer generally won’t approve any charge that would cause your total outstanding balance to exceed your credit limit.How do credit card limits work exactly? As an example, suppose you choose a credit card because it features 0% APR with cashback offers. It came with a $3,000 credit limit, and you currently have a balance of $2,500. You could make a purchase of up to $500, but then you will have exhausted your credit limit.After that, it’s likely that you wouldn’t be able to make any further purchases until you’ve paid down your balances. And if you tried to make a new purchase that’s over $500, then it’s likely that the purchase would have been declined. That’s why your credit limit is important to be aware of when reading a credit card statement.

What Determines Credit Limits?

With most credit cards, your credit limit is determined based on your creditworthiness at the time you applied. Card issuers will determine your creditworthiness based on your credit score, but they can also use other factors, such as your reported income as well as your current balance and your payment history with the card issuer. Those who maintain low balances and have a strong record of on-time payments will have greater spending power. Those who carry larger balances and make late payments will see their spending power shrink. However, some credit cards are specifically marketed as having no predetermined credit limit. This allows the card issuer to approve new charges on a case-by-case basis. Some of the cashback cards to consider have no preset spending limit. However, it’s unlikely that you’ll find this feature on fair credit cards

Does a Credit Limit Affect Credit Utilization?

When learning about how consumer credit works, one important credit card term that you might have heard of is credit utilization, which is sometimes referred to as your debt-to-credit ratio. This is the total amount of outstanding balances you have, divided by the total amount of credit that you've been extended, across all of your revolving accounts. Having a lower credit utilization ratio could result in a higher credit score. And while lowering the amount of your outstanding balances will affect your debt-to-credit ratio, so will the size of your credit limits. The higher your total credit limit, the lower your credit utilization ratio will be, for a given amount of debt. In other words, the amount of your credit limit is just as important to your utilization ratio as your amount of debt.For instance, suppose you have a total of $1,000 in outstanding debt across all of your credit cards. If the total amount of your credit limits across all of your credit cards is just $1,500, then your credit utilization ratio is 67%, which is considered high. Most credit experts will recommend that you keep your credit utilization ratio below 30%, although there’s nothing special about that particular number. However, if your credit limits across all of your cards added up to $5,000, then your credit utilization ratio will be a much more favorable 20%, so long as you still have just $1,000 in outstanding balances. So in this case, the credit limit is the key factor in determining your credit utilization.

When Does a Credit Card Limit Reset?

Your account’s credit limit is based on your current outstanding balance. When you make a payment, you will lower your account’s outstanding balance, and increase your credit limit. 

When Does Credit Your Limit Reset After Payment?

The payment must be received by the card issuer and credited to your account before you can expect to have a higher credit limit. If you’re transferring funds from a checking or savings account also held by the same institution, then the payment should be credited to your account very quickly. If you transfer funds electronically from another institution, then it might take a few days until the payment is applied. And if you mail in a check, it can take several days until the funds are fully credited to your account, depending on the card issuer’s policy. Once the payment is no longer pending, that’s when your available credit resets. 

Does Your Credit Card Limit Reset Every Month?

Every time you make a payment to your credit card account and that payment is credited to your account, it will reset your credit limit. So if you make a payment every month, then it will reset your credit limit monthly. 

Is It Possible to Increase a Credit Card’s Credit Limit?

When you open a new credit card account, it will often have a credit limit assigned to it. The exceptions are cards with no preset spending limit. But if your card does have a spending limit, then it may be possible to have your credit limit increased. One way to increase your credit limit is to simply call and ask. If your credit score has improved since your account was opened, then the card issuer may offer you a higher credit limit. You may also be able to receive a higher credit limit if your household income has increased. Also, some credit card issuers will allow you to reallocate a portion of your existing credit limit from one account to another, without increasing your total credit limit.

What Happens When You Reach Your Credit Card Limit?

When you reach your credit limit with a particular credit card account, then you may not be able to make any further charges. And while there was once a time when many card issuers would impose an “over the limit fee,” these charges are now extremely rare. There are reportedly few, if any, card issuers that still impose them.However, most credit card issuers will still prevent you from making any new charges that will cause you to go over your credit limit. Some card issuers will approve charges that exceed your credit limit, but only on a case-by-case basis. But once you’ve made payments that reduce your balance below your account’s credit limit, you’ll be able to use your card again. 

Options When You Hit Your Credit Limit

If you’ve reached your account’s credit limit, then you have several options:
  • Make a payment: First, you can make a payment to reduce your outstanding balance below your credit limit. In fact, you don’t need to wait until you receive a statement or until your payment is due; you can make a payment at any time. 
  • Ask to increase your limit: Alternatively, you can contact the card issuer and ask it to increase your credit limit. And if you hold other accounts with that card issuer, then you can request that a portion of your unused credit limit be reallocated to the account that has exceeded its limit.
  • Wait it out: Lastly, you can simply do nothing. You can just continue to pay your credit card account in accordance with its terms until your outstanding balance falls below the credit limit again. 

Compare Credit Card Offers With Lantern

Once you understand what a credit limit is and how it works with your credit card, you’ll be in a better position to choose the best cards for your needs. Indeed, how a card’s credit limit works is often important among factors to consider when choosing a credit cardIf you need some help shopping around for the right credit card for your needs, Lantern by SoFi can help. Our credit card comparison makes it easy to see how different cards stack up.
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About the Author

Jason Steele

Jason Steele

Jason Steele has been writing about credit cards and award travel since 2008. One of the nation's leading experts in this field, he has contributed to dozens of personal finance and travel outlets and has been widely quoted in the mainstream media.
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