A credit limit is referred to as the maximum amount of credit a financial institution extends to a client. It is the amount of unsecured and secured credit that a lender will lend to a borrower.
For instance, when a card issuer approves a credit card for you. The issuer sets a limit on how much you can spend. This is referred to as a limit on all user’s credits.
When you reach your credit limit; you will not be able to use your card till you have paid down your balance enough to use all or some of it.
Some issuers may allow you to cross your limit. But know that an over-limit penalty fee will be charged.
Credit issuers usually set their credit limit based on the information they receive from the credit-seeking applicant. It affects consumers’ credit scores and it can also affect their ability to acquire credit in the future.
Lenders usually grant credit limits based on factors like the borrower’s credit score. The other types of credit they have, their income and on-time payment history, and other factors.
How Does Credit Limit Work?
Credit cards are useful to us but they have limits. So, to maximize your card, you need to know how the limit works. This limit works the same way. It does not matter if the borrower has a credit limit or a credit line.
As a borrower, you are allowed to spend up to his or her credit limit. But when that amount is surpassed, you will then face penalties or pay fines in addition to the regular payment.
If you spend less than the amount, you will continue to use the credit card or line until your limit is reached.
Note that as you make use of your card, the amount of each of your purchases is deducted from your credit limit. And the number you are left with is referred to as your available credit.
How are Credit Limits Determined
Credit limits are set by lenders but they are determined by other factors. Your issuer will look at things like your credit score, credit report, etc. Here are some factors that will determine when to increase your limit.
- Payment history.
- Current accounts.
- Account history.
- Debt.
- Income.
1. Payment History
Your payment history is a credit limit determining factor because your issuer will ask. If you pay your bills on time and if you have ever filed for bankruptcy or had debt sent to collection.
2. Current Accounts
The number of accounts you have open and the kind of loans you have open is also determining factor.
3. Account History
Your issuer will want to know how long you have had your current accounts and if you have recently applied for new credit.
4. Debt
The debt you use, the amount of credit you are using. And your available cash will determine what limit you get.
5. Income
Your issuer will want to know if you make money enough to cover your monthly bill.
Note that if you are not happy with your credit limit, you can apply for an increase. To find out more about increasing your limit, stay on this page.
How does Increasing Credit Limit work?
The credit limit is set when your card issuer first gives you your card application. Then if you pay your bills on time and stay below your limit. You will then show your issuer that you can manage your account very well.
This will in turn cause your issuer to grant you an increase in your credit limit. Which awards you with more spending power and will also allow you to build your credit.
An increased credit limit allows you to use your credit card to make large purchases and finance more necessities. Also, cater to emergencies without making your credit utilization climb too high.
However, every card issuer has its policies for giving credit increases. But generally, you need to be a cardholder for at least six months to get your credit increased.
And you should not have requested an increase in credit limit in the past six months. And before your card issuer will grant you an increase in credit, he or she will want to ensure that;
- You have been a responsible cardholder. This implies that you have made your payments on time and there are no over-the-limit purchases.
- That your income is enough to cover monthly housing and debt. To increase your limit, you must ensure that your income can cover monthly housing and debt.
- If your income has recently increased, you have a great chance of being approved for a credit limit increase.
- And that your credit is in very good shape. Your payment history, credit utilization, and other factors that contribute to your credit score need to be in good shape across all your credit accounts.
If all these measures are in place, then you stand a chance of getting an increase in your credit limit.
How to Increase Credit Limit?
It is very possible to increase your limit and increasing your credit is no big deal. You can do this by making a request, which is calling your credit card issuer. To reach out to your credit card issuer, call the number on the back of your card and ask.
Then you will have to wait to see if your credit card issuer will increase your credit limit. If you need a higher credit limit.
You should work on qualifying for it by using your credit card regularly. And making your payments on time each month. Increasing your credit limit depends greatly on your credit history and your spending needs.