How is Credit Limit Determined and How Can I Increase Mine?
If you've looked at the terms for your credit cards, you may have noticed that each one has its own credit limit, or the maximum amount of money you can charge to the card. When you add the credit limits of each card, you get your total credit limit. But how is credit limit determined and how can you increase yours?
What is a Credit Limit?
When a company issues you a credit card, they also issue you a credit limit. The limit is the maximum amount of money you're able to spend. Each card has a unique credit limit attached to it. Therefore, if you have three credit cards and card A's credit limit is $4,000, card B's limit is $9,000, and card C's limit is $5,000, your total credit limit is $18,000. While these numbers may seem arbitrary, they're actually based on specific criteria.
How Your Credit Limit Is Determined
To determine the amount of credit they're willing to give you, credit card companies use company policies in addition to the information you provided on your card application.
For starters, credit card companies have internal limits they set for each type of credit card. If you apply for what's considered an "elite card," there may be no preset limit, while another card may have a minimum credit limit. Credit card companies also assess a number of past and present personal financial indicators to determine your credit limit, including:
- Your credit report (to see how you've handled past lines of credit)
- Other credit limits you've been granted
- Your credit score
- Your current debt
- Your income
How to Increase Your Credit Limit
Sometimes, your credit card company will increase your credit limit automatically. When this occurs, you'll receive a notification letter detailing the increase. Otherwise, if you'd like an increase, you can contact your credit card company to request one. There are several actions you can take that will help you negotiate a higher credit limit.
If you're looking to raise your credit limit, aim to pay down some of your debt. Paying down debt can usually raise your credit score, which makes it more likely for you to get a limit increase. Consider closing an account; if you can show that your overall credit limit has diminished, then the card you want to keep may grant you a larger credit line. Finally, if you're able to increase your income from the time you first applied for the card, you'll have good reason to request a credit line increase.
One perk of increasing your credit limit is that your credit score usually goes up as well. That's because a credit score is partly based on your credit utilization rate, or the amount of credit you have versus how much you're using. If you raise your overall credit limit then your credit utilization rate goes down, which should increase your credit score. If you're planning to make a large purchase, such as a house or a car, having a higher credit score will help get you more preferable loan terms.