Credit Card Limit: Learn to Use It to Your Advantage

Credit card ownership and spending is on the rise, with more than 54% of American cardholders starting their credit journey between the ages of 18 and 20. But not all cards are created equal. One of the distinguishing characteristics is the credit card limit. 

This determines the amount of money you can spend on the card before having to pay the balance. Your credit limit is determined by your income, credit history, and other financial considerations. Keep reading to learn more about other relevant factors like credit utilization and how all this can affect your credit score. 

What Is a Credit Limit?

A credit limit is also referred to as a line of credit or a spending limit, and it’s used to describe the maximum amount of money you can charge to your card before having to pay back the loan without facing penalties. This is normally done once per month. 

Of course, the higher the limit, the more you can spend. The amount of each purchase is subtracted from the available credit, taking you closer to the limit, which is predetermined by the lender (bank or credit union).         

Now that we’ve covered the credit limit definition, it’s important to outline how this affects other aspects of your financial health:  

• Keeping your credit utilization below a certain threshold can improve your credit score. 
• Sticking to your limit and paying off the balance on time helps you avoid debt.
• Higher limits mean more flexibility, but this can also lead to debt.
• Cardholders borrow money while maintaining a good credit score.

Credit Card Limits: Average and Expectations

All credit cards have credit limits. The maximum amount you can spend without being charged interest or having the card declined is part of your contract with the lender. Your credit limit is determined by several factors, including your credit history and overall financial situation.

According to data compiled by Experian, the 2020 average credit card limit among Americans was $30,365. However, the average credit limit on the first credit card was between $5,000 and $6,000. 

In a separate study, Experian outlined the average credit limits by generation, which reveals that baby boomers have the highest limits:  

• 75+: $33,603
• 56-74: $39,915
• 40-55 (Gen X): $33,363
• 24-39 (Millennials): $20,652
• 18-22 (Gen Z): $8,064

Setting the Credit Limit

It can be hard to come up with an accurate estimate of your credit limit. This is because the decision is made by the revolving loan lender or credit card issuer. Below we’ll outline the long list of factors that impact the credit limit.  

How Is a Credit Limit Determined?

Your credit card issuer will determine your credit card limit. Some of the factors considered include:

• Income and employment status
• Payment and credit history
• Credit score
• Credit inquiries
• Credit accounts
• Credit utilization
• Debt-to-income ratio or debt as a percentage of income
• Other credit card limits
• Monthly rent and other bills

When card issuers set your credit card spending limit, they will look to provide you with the funds you need without putting you in a position where you’ll struggle to cover your expenses during each billing cycle. 

To understand what the right limit for you is, they will review your financial history, looking for cues. For example, if you have a poor credit score or a history of late payments, you’ll only be able to obtain a card with a low limit. 

Increasing Your Credit Limit

A low credit card limit is the number one of the main reasons for dissatisfaction among US cardholders. Still, there are a few things you can do to secure the limit you want:

• Annual reviews of employment and salary increases can lead to a higher spending limit.
• Credit score growth can increase limits.
• Sign up for credit cards secured by a deposit.
• You can be approved for limit increases based on how you are managing your card.

You can always check changes to your credit card limit by logging into your online account or contacting the credit card issuer. Bear in mind that changes to your spending limit can occur based on how you’re using your credit card. Other key factors include your payment history and changes in your overall financial situation. 

At the same time, taking on more debt, missing payments, not using the card, and filing incorrect credit reports can cause your credit limit to decrease. 

Learn How to Use Your Credit Limit

Your credit limit determines how much you can spend, and your transactions won’t be declined unless you reach or exceed your spending limit. Nonetheless, lenders prefer that you spend no more than 30% of your credit limit. This is referred to as the utilization rate.

Here is a credit limit example for reference:

• If your limit is $1000, you should keep your balance at $300.
• If your limit is $500, keep your balance at $150.

As a general rule, you should keep your credit card balance as low as possible and pay your balance in full every month.

Using Your Credit Card to Improve Your Credit Score

Your credit card - and the way you use it - plays an important role in determining your credit score. In turn, a low credit score will affect your ability to secure loans and even access certain job opportunities.