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What Is a Credit Card Limit and How Is It Determined

A credit limit is the maximum amount you can spend and which can be outstanding at any time on your account (including use by any additional cardmembers). Your credit card’s financial institution will approve you for a specific amount and define how long the credit card statement period is.

December 17, 2020 in Learn

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How is your credit limit determined?

Your credit limit is determined by your credit card issuer and may be based on several factors that help the credit card issuer determine your creditworthiness, such as:

 

● Personal income and expenses

 

● Length of credit history

 

● Credit score

 

● Debt-to-income (DTI) ratio

 

● Current limits on other credit cards.

Personal income and expenses

When you apply for a credit card it is likely that you will be asked to verify your salary.  Your living expenses will also be taken into account, such as your mortgage or rent payments. An individual with higher income and lower expenses may be approved for a higher credit limit.

Length of credit history

Having a lengthy credit history may help you be approved for a larger credit card limit. Your credit history also should be in good standing, meaning that you’ve made your payments on time.

Credit score

Your credit score may influence the credit limit that you are approved for. The higher your credit score, the more likely you are to be approved for a larger credit card limit. In Canada, your credit score can be anywhere from 300-900. Most creditors consider 600 and lower to be a bad score.

Debt-to-income ratio

This ratio calculates how much debt you have compared to your income. The more debt you carry, the less likely you are to qualify for a large credit limit with your credit card. The higher the income you have, the more likely you are to receive a higher credit limit.

Current limits on other credit cards

The credit limits you have been approved for in the past can affect what you’re approved for in the future. If credit card companies have given you large limits, you are likely to be approved for a large limit again. Conversely, if you have only received small credit limits, your next credit card may follow suit.

Credit limit vs. available credit

Understanding the difference between available credit and your credit limit is important as they are two very different things. Your credit limit is the amount of credit you have been approved for by the lender. The available credit is the amount  that you could spend on your credit card.

 

For example, if you have a $10,000 credit limit and you spend $2,000, you would have $8,000 in available credit. If you then made a payment of $500 to your credit card, you would have $8,500 in available credit.

 

You can request a credit limit increase or decrease online for your American Express Credit Card or by calling the number on the back of your Card. Before you apply for an increase, it is important that you consider your personal financial circumstances. Additionally, if you are looking to make an increase due to an upcoming large purchase, check your spending power first1.

How your credit limit affects your credit score

One possible impact is through credit utilization. If your credit usage is close to your credit limit, your credit score could be negatively impacted. The balance of your credit card is reported to the credit bureaus on a monthly basis, and this balance is used to calculate your credit score. A high credit utilization may also impact applications for credit in the future.

Charge cards

If you are looking for a card without an assigned credit limit, you may want to consider a charge card. A charge card gives you the financial flexibility of no pre-set spending limit on purchases2. However, you must pay off the balance in full every month.

Increasing your credit limit

If you are looking to increase your credit limit, you should consider a few things, such as how it may affect your credit score and whether you can pay off the amount you’re spending in full each month. There are a couple different ways to increase your credit limit:

● Your lender may automatically contact you and ask if you’d like a credit limit increase. You can decide from there if you want to increase it or not.

● Asking for an increase: You can apply to increase your credit limit with an existing credit card. At American Express, you are able to apply for a credit limit increase to one Credit Card every six months.

● Apply for a new card: If you’re looking for more credit, then you might consider applying for a new card. If your income has recently increased and your history is good when it comes to making payments on time, then you are more likely to be approved for a new card.

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