What is a credit limit, and how is it determined?

Credit cards can be useful tools. But they have their limits when it comes to spending. Specifically, credit limits. 

This article will detail how credit limits work, how credit limits are set and what might happen if you spend more than the credit limit on your credit line.

What you’ll learn:

• A credit limit is the amount of credit a lender grants you on a credit card or other type of credit account.

• Lenders determine your credit limit by examining your credit history and financial information.

• You can typically only spend up to your credit limit until you repay some or all of your balance. Spending more than your credit limit could result in penalties.

• Capital One cardholders are never charged over-the-limit penalties on credit card balances. View important rates and disclosures.

In general, a credit limit is the maximum amount of money a borrower or cardholder can charge on a revolving credit account. Maxing out a credit card happens when its limit is met or exceeded.

Credit limits are often associated with credit cards. But they can also be applicable to other lines of credit.

Lenders typically determine credit limits after a person has applied for a credit card. Like the decision to approve or decline an application, credit limits are often based on creditworthiness, which is determined by reviewing credit reports and credit history.

Credit limits don’t stay the same forever. You may be able to request a credit limit increase. In some cases, lenders proactively adjust credit limits. That could mean an increase or a decrease, depending on the circumstances.

Credit limits aren’t the same thing as your available credit. But the two are related.

Purchases and other transactions, such as cash advances, will reduce your available credit. And so will any credit card interest and fees you’re charged. But those things don’t change your credit limit.

For example, consider the following scenario. If your credit card has a $10,000 credit limit and you buy a $4,000 sofa, your credit limit remains $10,000. But your available credit will drop to $6,000.

As you make monthly payments on the account, your available credit goes back up by that amount—minus any other charges. So if you don’t add to your balance and decide to make a $2,500 payment, your available credit will increase to $8,500. In turn, your credit card balance would drop to $1,500, but your credit limit would still be $10,000.

Credit limits are set by lenders to help prevent overspending—among other things. Lenders typically look at credit scores and credit reports when reviewing credit applications. Other factors lenders may consider when setting credit limits include:

• Payment history: Do you pay your bills, including monthly credit card bills, on time? Have you ever filed for bankruptcy or had a debt sent to collections?

• Current accounts: How many accounts do you have open? And what kinds of loans do you have open? Do you sustain high balances across your existing credit cards?

• Account history: How long have you had your current accounts? Have you applied for a bunch of new credit recently?

• Credit card debt: How much do you owe? How much credit are you using? How much do you have available?

• Income: Do you make enough money to cover your monthly bill?

Your credit limit has an important relationship with your credit utilization ratio. Credit utilization is the percentage of available credit you’re using across all your revolving accounts. And it’s one factor that affects credit scores. The Consumer Financial Protection Bureau (CFPB) recommends keeping your credit utilization rate under 30%. The agency also says paying off your credit cards every month is the best way to keep that number low.

A higher credit limit may allow you to spend more while keeping your utilization low, which could have a positive impact on your scores. But that freedom and flexibility come with additional responsibility. High credit limits also make it easier to build debt quickly, which could have negative impacts on scores. 

But it’s important to remember that credit utilization is just one of the factors that can help determine good credit scores.

Capital One cardholders are never charged over-the-limit fees. View important rates and disclosures. And eligible cardholders may be able to exceed their credit limits. If your account has access, you can use the Confirm Purchasing Power tool to check whether an over-limit purchase may be approved. You can also disable the ability to spend over your credit limit in your over-limit preferences.

Other credit card issuers may handle things differently. If you go over your credit limit, your card could be declined. If you’re part of the optional over-the-limit coverage program, you could also be charged a fee for each billing cycle that you exceed your credit limit.

Your credit card company must tell you how much these fees are before you opt in. And if you opted in by mistake, you can change your preference at any time. But you could still have to pay any fees that were already charged if your balance stays above your limit after you opt out. Contact your credit card company if you’re unsure of your program enrollment.

Credit cards are one tool that can be used to build credit or create financial flexibility—but only if you’re using them responsibly. Part of responsible credit use starts with knowing your credit limit and making on-time payments every month. 

Whether you’re interested in increasing your credit limit or opening up a new line of credit, compare cards today to understand your options.