Credit limits are the maximum loan amount a lender will offer a borrower. It could be a credit card or a home equity line of credit. The maximum amount of money a lender offers to a borrower is called their credit limit.
When extending credit, the lender will set a credit limit. The lender will determine the credit limit based on the borrower’s income, credit score and payment history.
For secured loans, such as a mortgage or home equity line, the credit limit will be determined by the borrower’s income, property value, or remaining home equity. This article is for credit card accounts only.
Credit Limit vs Available Credit
Credit card debt is “revolving”, meaning that the amount you pay monthly and how much you use it are the determinants of your credit score. There is a limit on the funds you can use with a credit card account. For example, a card with a $5,000 limit is the maximum amount you can use at any time. After taking into account what you have used, your available credit is the amount of credit that is left over from your credit limit. If you have a $5,000 credit limit and spend $3,000 on the credit card, you will have $2,000 in credit remaining. You would have $4,000 if you reduced your credit limit by $1,000
How to Change Your Credit Limit
A creditor might increase your credit limit if you have a track record of good payments and have not borrowed more than your limit. This is good news for your credit score because it is partly based on your usage rate. It can be risky if you are concerned about borrowing more than your credit limit. An increase in credit limit is acceptable as long as you do not have a problem with spending and diligently pay your credit card debts.
However, there are certain cases where your credit limit can become too high to attract lenders. Lenders won’t extend credit if your total credit limit exceeds what you can afford to repay or if all of your credit has been exhausted. You might ask your creditors to lower your credit limits so that you are less likely to default to new lenders.
Even if you do not ask, there are situations where the creditor might reduce your credit limit. The creditor may reduce your credit limit if you default on payments or show behaviour that could make it appear you might. This will affect your credit score and increase your risk of defaulting on your credit.
Go beyond your limit.
Credit card companies used to allow people to overspend or exceed their credit limit. The borrower benefited from the transaction not being declined at the cash register. Creditors charge “over-limit” fees every billing period if the account exceeds the credit limit. This fee, usually around $35, was added to your credit balance. It can make you even more in debt. You might also lose any credit card rewards you have earned by exceeding your limit.
People were often caught in a loop of fees because they could be pushed over the limit by the over-limit fee. This was a problem, so new laws were made to stop it.
The Credit CARD Act, which limited the fees that creditors could charge, was passed ten years ago. To be able for an account to exceed the limit or incur fees, borrowers must opt-in. These fees are limited. If the account is over the limit, one cannot be charged an over-limit fee twice in a row. A $25 maximum fee for the first incident exceeding the limit is required. $35 would be charged for the second incident within six months.
Another provision in the law states that an over-limit fee cannot be higher than the amount you have exceeded. If you exceed your $5,000 limit and reach $5,010, you will be subject to a $10 fee.
Your best option is to avoid opting into over-limit fees. Your card might be declined if your limit is exceeded. This will cause embarrassment and inconvenience and cost you extra fees. According to the CFPB’s (Consumer Financial Protection Bureau) “CARD Act” Report, it saved borrowers 2.5 Billion dollars in over-limit fees in its first two years of operation.
Increase Your Credit Limit
Although you can increase your overall credit limit by opening an additional account, there are some disadvantages. You’ll increase your risk exposure, take a hit on your credit score (because of new credit) and may appear riskier to lenders. A new account may offer lower rates or a great deal on a balance transfer.
Asking your creditors is another way to increase credit limits. Call your creditors to request an increase in credit limit. It is possible to request an increase in credit limit from your creditor if you have a good payment history, have a high credit score, and have sufficient income.
This request could trigger a hard inquiry into your credit file. Make sure you check your credit reports before asking. Spend time reviewing any negative information on your credit report before asking for a higher limit.