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How is Your Credit Limit Determined?

Sandra MacGregor

May 26, 2022 6 min read

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How is Your Credit Limit Determined?
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    A credit limit is the maximum amount a cardholder is permitted to charge to their credit card. There are mainly three credit scoring models that credit card providers use to determine your credit limit: a credit score model, a predetermined limit model and a more individually customized mode. 

    What Is a Credit Limit and Why is it Important?

    A credit limit is the maximum amount of spending that a cardholder is allowed to charge to their credit card. While your card could be declined if you try to go over the limit, many credit card issuers allow you to go at least a little above your limit in some cases. However, depending on your provider, often there may also be a penalty fee if you exceed your limit. Preventing the accumulation of unwanted fees (which can be as much as $30 each time you go over) is just one reason it’s crucial to know your limit and keep track of your spending so you don’t unknowingly exceed it.

    Credit Card Application

    Another reason a credit limit is so important is because of the way it influences your credit utilization ratio. Credit utilization is the amount of credit you’re using out of the total amount of credit you have available to you at any one time. After payment history, credit utilization is the largest factor credit bureaus rely on to calculate your financial health, accounting for 30% of your overall credit score. Credit bureaus like to see that you’re using no more than 30% of the credit you have available to you.

    You can calculate your credit utilization rate by adding up the balances from all of your credit cards and dividing that total balance by your total credit limits. So, for example, if you have three credit cards each with an assigned credit limit of $4,000 (for a total maximum of $12,000 credit) and you have a $2,000 balance on each card (for a total of $6,000) than you would have a credit utilization ratio of 50% (6,000 / 12,000 = .5 x 100). This ratio would be considered too high by credit bureaus. 

    3 Ways Your Credit is Determined

    In general, credit card companies rely on three main credit scoring models (and all the variables that go into the models) to determine the credit limit for your credit card:

    Credit-Based Limit

    With the credit-based limit, credit card providers mainly rely on your overall credit score to decide what your credit limit will be. While your income and other factors may come into play, it’s your credit score that issuers care about the most.

    Remember that your credit score is a number calculated by Canada’s credit bureaus (Equifax and TransUnion). The five factors that go into your score are payment history, credit utilization ratio, credit history, credit mix and credit inquiries. So, it’s those five components that will ultimately decide your credit limit. You can find out your credit score for free with Borrowell.

    That’s not to say that you’ll have a really low credit limit if you don’t have an excellent score, it just means that your limit might be on the low end of the available range. For example, if the credit card has a credit limit range of $1000 to $10,000, your credit limit would be $1000 or $2000 if you have a lower than average score.

    Credit Card Responsibly
    Preset Credit Limit

    There are some credit card providers who simply have a baseline credit limit that is the same for all applicants and is not dependent on a person’s credit score. This can be common with basic or entry level credit cards. These kinds of credit cards might just have a low predetermined credit limit of $1,000 and all applicants get the same limit. If you’re not satisfied with the limit, you can always try to ask for an increase, though it may be best to wait until you’ve had the card for a while to prove that you’re creditworthy. 

    Customized Credit Limit

    Some credit card issuers prefer to use a customized credit limit. This is when an issuer gives each cardholder a very individualized limit that is specifically based on their own unique profile. To arrive at a customized credit limit, providers will consider a variety of factors, including an applicant’s credit score, their income, their debt load, how many other credit cards they have and more. 

    How to Increase Your Credit Limit?

    As previously discussed, the higher your credit limit is on your credit cards, the easier it will be to keep your overall credit utilization rate low, which will in turn improve your credit score. If you feel you won’t be tempted to overspend, increasing your credit limit can be a smart financial decision. There are two main ways to increase your credit limit:

    Wait until your credit limit is raised

    If your account is in good standing, credit card providers will occasionally reach out to cardholders and ask them if they want to increase their credit limit. It’s important to note that, in Canada, credit card companies are legally required to ask a cardholder’s permission before increasing their credit limit. This is because some cardholders purposefully keep their credit limits on the lower end to help keep their spending in check. In fact, it’s good to keep in mind that, even if you had once asked for an increase, if your situation changes, you can always request a credit limit decrease if you’re concerned about potential overspending. 

    Request a credit limit increase with the credit card company

    You can also reach out to the credit card provider to ask for a credit increase. Some providers can be very receptive to credit limit increase requests. They may even have a clearly marked link labelled something like “Ask For An Increase” on your online credit card statement. It can also be a good idea to contact your provider directly to ask for a raise in your limit, especially if you want to let them know about factors that could impact their decision, such as an increase in your income. 

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    Is it Good to Have a High Credit Limit?

    There is really no straightforward answer as to whether or not it’s good to have a high credit limit because it really depends on each individual cardholder and how responsibly they use their card. If a high limit encourages someone to spend beyond their means and accumulate high-interest debt, then a high limit should be avoided. For a disciplined spender however, a high credit limit can help increase their credit utilization ratio and thus improve their overall score. 

    How Does Your Credit Limit Affect Your Credit Score?

    As noted above, your credit card limit can impact your credit score because it plays an important part in calculating your credit utilization ratio. The higher your assigned credit limit, the more available credit you’ll have, which will make it easier to keep your credit utilization ratio below 30%. The better job you can do of keeping your ratio below 30%, the higher your credit score could potentially rise. So, if you use your card responsibly, it’s worth considering asking for more credit.

    The Bottom Line

    There are many factors that go into a card provider’s credit limit calculations, and it can be hard to know whether or not your issuer is flexible about increasing limits. If you’re not happy with your initial credit limit, it never hurts to ask for a higher limit as long as you can be disciplined enough not to overspend.

    Sandra MacGregor
    Sandra MacGregor
     | 
    Personal Finance Writer
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    Sandra MacGregor is a professional writer who specializes in topics such as finance, travel, health, and lifestyle. Her work has been featured in the Toronto Star, the Montreal Gazette, and the New York Times. She is a regular contributor to the Borrowell blog.

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