If you own or plan on owning a credit card, chances are you’re already bamboozled with confusing technical or financial terms. ‘Credit limit’ is one such financial term that may leave you scratching your head.
A credit limit tells you how much money you can spend on your credit card. It depends on various factors like your income, age, credibility, and the card chosen. Credit limit further plays an important role in determining your credit score.
Thus, it’s indispensable that you thoroughly understand the credit limit’s concept, how it works, and the average credit card limit. In the article up next, you’ll find all about credit limits and how to increase yours.
What Does Credit Limit Mean?
In the simplest sense, the credit limit, also known as the line of credit, of your card refers to the maximum outstanding balance that you can have on the card.
You can also think of a credit limit as a flexible, unsecured loan from a credit card company or bank. You cannot spend more than the credit limit using your card.
However, you opted for over-the-limit transactions, in which case you can spend more money, but it will be penalized. You can only know your credit limit once your credit card application is approved (in case of an unsecured credit card).
However, in the case of a secured credit card, the credit limit is the same as the security deposit.
Purpose of Credit Limit
A credit limit is set in place so that the cardholder has some limitation on the amount of money he can borrow and use. Apart from that, the main use of credit limit is in determining your credit score.
Your credit card issuer reports your card usage every month, including the limit and balance, to credit bureaus. It is used to calculate your credit utilization rate, and thus credit limit may make up about 30% of your credit score.
What Determines Your Credit Limit?
Since the credit limit is the maximum amount you can take on credit, the lender (or the issuer of the credit card) has the discretion to decide your credit limit. The bank or credit card company may use various parameters to judge your creditworthiness.
One important parameter is your past credit record. The bank generally agrees to extend a higher limit to someone with a good credit score. Another important parameter is your income in proportion to your monthly expenses.
Naturally, the lender feels someone with a higher income can afford to repay a higher limit if used. Apart from these, some other parameters that credit card issuer might consider include length of credit history, age/experience, or payment history.
What is the Average Credit Limit in the US?
The average credit limit is a very dynamic figure that varies over time and from person-to-person. Generally, the average credit limit lies on the higher end of the scale for high-income people and credibility.
While the global average of credit limits is not known, Experian released data regarding American consumers’ average credit limit. It amounts to $31,015 across all the cards that a person may possess on average.
The data also suggested that older people with a longer credit history tend to have higher average credit limits as compared to Gen Z.
How to Increase Your Credit Limit
There’s no quick and easy way of increasing your credit limit as it depends on good financial conduct. Generally, credit card companies offer regular revision credit limits at certain intervals.
Within this period, you should pay your dues on time and keep your credit utilization (% of credit limit used) low. When the bank verifies, it automatically increases your credit limit.
However, you can also voluntarily request your bank to increase your credit limit by contacting the representatives. The eligibility remains the same, which is to be verified by the bank before increasing your limit.
Kindly note that your credit limit can also decrease in case of non-payment, late payment, or very high credit utilization.
Now that you know everything about the credit limit, you can use your credit card more wisely. It’s advisable to only keep 10-30% of your total credit card limit as an outstanding balance.
It reflects well on your part, and a low utilization rate makes you more credible in lenders’ eyes.