What Is a Credit Limit?

Definition and Examples of a Credit Limit

Your credit limit is the maximum outstanding balance you can have on a credit card or line of credit without being penalized. A line of credit is a flexible loan from a bank or credit union. Managing your credit limit is important for staying out of debt and building a good credit score.

For instance, if you applied for a credit card and were approved, you might be given a maximum limit of $5,000 if you have decent credit. On the other hand, someone with excellent credit might be given a limit of more than $20,000 on a credit card. How the card is used and your payment history then determine whether you build your credit score or reduce it, no matter what the limit is.

How a Credit Limit Works

Your credit issuer determines your credit limit when you apply for a credit card or line of credit. It assesses your income, current debt level, and credit history to make its decision. For instance, if you have a history of late payments or a significant amount of debt compared to your income, you may be approved for a low credit limit to start.

You typically won't know your credit limit until you've completed an application and are approved for a credit card. One exception is with a secured credit card, which is secured by a cash deposit. The cash deposit is used to pay off your card if you stop making payments. Card issuers usually give you a credit limit that's equal to your security deposit.

If you're (reasonably) unhappy with the credit limit you've received, you can request a bigger one or turn down the credit card.

Your credit limit might not stay the same the entire time you have the credit card. If you use your credit card wisely and make your monthly payments on time, you can be approved for periodic credit limit increases, sometimes without requesting them. Similarly, your credit limit can be lowered if you fall behind on payments or if your debt increases to a level that the credit card issuer deems risky.

You can find your credit limit on your billing statement by logging into your online account or calling your credit card's customer service.

How Much of Your Credit Limit Can You Use?

You can make purchases up to your credit limit. You might not be able to go over your credit limit, though, if you haven't opted-in to having over-the-limit transactions processed. If you don't opt-in, transactions that could put you over your limit will be declined.

If you opt-in, exceeding your credit limit may result in an over-the-limit fee, which can also trigger a penalty rate. A penalty rate is a higher interest rate that your card issuer can charge in specific circumstances.

Your credit limit also impacts your credit score. Each month, your credit limit and card balance are reported to the credit bureaus. This information is used to calculate your credit utilization, which measures the amount of your credit limit you're using. It counts for as much as 30% of your credit score.

The higher your credit card balance is, relative to your credit limit, the higher your credit utilization will be. This brings your credit score down, making it harder to qualify for loans and credit. Card issuers may also deny credit limit increases if you have a high credit card balance. To achieve the best credit score, it's best to keep your credit card balances at less than 30% of your credit limit.

Alternatives to a Credit Limit

Some credit cards don't have a firm credit limit or a preset spending limit. Credit cards with no preset spending limit don't give you an infinite amount of available credit. Instead, these cards have a fluctuating spending limit that changes based on your current spending habits, income, credit history, and other factors. Each card issuer has its own formula for determining your spending limit, and you may be able to exceed your limit without a penalty at the issuer's discretion.