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 your credit limit is set and what happens if you spend more than your credit limit.

Key takeaways

• 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.

A credit limit is the maximum amount of money you can charge on a revolving credit account, such as a credit card or line of credit. As you use your card, the amount of each purchase is subtracted from your credit limit and added to your balance. The amount you’re left with is known as your available credit.

Your creditor will typically determine your credit limit based on factors like your income, credit scores and payment history. And the more responsible you are with your money, the higher your credit limit may be. 

Once your creditor determines your credit limit, you can spend up to that amount. So if you get a new credit card with a limit of $10,000, you could spend up to $10,000 before maxing out your credit card.

It’s important to remember that your credit limit isn’t the same thing as your available credit. 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 on it the next month, your available credit will increase to $8,500 and your credit card balance will drop to $1,500, but your credit limit will remain $10,000.

Remember: Credit limits are set by lenders. And there are a variety of things that could factor into the decision. Companies might look at things like your credit scores, your credit reports and your credit application.

Here are some potential questions lenders may consider:

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

If you are unhappy with your credit limit, you could ask for a credit limit increase. And in some cases, your lender could decide on its own to adjust your credit limit. That could mean an increase or a decrease, depending on the circumstances.

Whether it’s $1,000 or $100,000, learn more about what might be a good credit limit for you.

Your credit limit has an important relationship with your credit utilization ratio. That’s because credit utilization is the percentage of available credit you’re using, and it’s one factor that can affect your credit scores. The Consumer Financial Protection Bureau (CFPB) recommends keeping your credit utilization rate under 30%. The CFPB 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 result in a negative impact on your scores. 

That said, it’s important to remember that many factors can affect your credit scores—not just your credit utilization.

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 overlimit purchase may be approved. You can also disable the ability to spend over your credit limit in your overlimit 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. 

If going over your credit card limit is a concern, you may consider applying for a credit limit increase or a new credit card. 

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

But that’s just the start. Knowing how your credit card works can also help you use it responsibly. You can find out more about credit card basics by reading Capital One articles on the importance of credit, credit card interest and payment grace periods.