By Karen Lynch | American Express Credit Intel Freelance Contributor
6 Min Read | October 28, 2020 in Cards
Ever maxed out your credit card? More than half of Americans with credit cards have, according to a 2019 survey. On purpose or not, 52% said they have hit their credit card limit at some point.1
Hitting your credit limit is not a good idea, for several reasons – and not just the embarrassment of having a restaurant decline your card in front of your friends. Experts say you shouldn’t even come close to your limit. To help you stay within your credit guardrails, here’s a primer on credit limits, how they work, and how they can affect your personal debt and credit score.
Credit card companies extend their card members a line of credit with a built-in limit – the maximum amount of money you can owe to the card issuer at any time, whether you use it up in a year, a month, or an hour. It’s always listed on your monthly statement, and could range from a few hundred to tens of thousands of dollars. The sum of Americans’ credit limits on all credit cards reached $4.3 trillion in 2018, according to the Consumer Financial Protection Bureau (CFPB).2 And one of the major credit bureaus reported the following average per-person credit limits for 2019, across one or more credit cards, by age:3
Whatever your credit limit, experts suggest that you keep your credit card balance well below it. Your credit utilization ratio – what you owe on a card divided by the credit limit – should be under 30%, they say, because higher ratios could lower your credit score. For more information, read “What Affects Your Credit Score.” However, research shows many Americans are well above that mark: “On average, 20-year-olds are using more than 50% of their available credit, and 50-year-olds are still using 40% of their credit,” according to an analysis by the U.S. Federal Reserve.4
As a practical matter, you may hit your limit but going over it is rare. The Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (CARD Act) requires credit card companies to ask card members to opt in to the ability to make overlimit transactions in return for overlimit fees, or the company cannot charge them.5 Instead, many companies decline overlimit transactions. Some card companies, including American Express, decide on a case-by-case basis whether to allow a given overlimit transaction based on your credit profile and spending habits, but don’t charge fees if the transaction is allowed. In fact, “overlimit fees that were common prior to the implementation of the CARD Act remained almost nonexistent in 2017 and 2018,” according to the CFPB.6
However, going over your limit is likely to cause your minimum payment to increase. And although some card issuers might close accounts in extreme cases, the biggest impact of maxing out could be damage to your credit score.7 Experts say you can talk to your credit card company if you make a credit limit mistake. If you act quickly, you may be able to avoid any record of the episode with credit reporting agencies by paying off the excess balance before your card’s billing date.8
It’s a good idea to find out how your card issuer handles over-the-limit transactions by reviewing your credit card agreement. To minimize credit limit issues, you may be able to set text alerts for when your card balance gets close to your limit, or perhaps for when your balance goes over the recommended credit utilization ratio of 30%.
Credit card companies typically review your personal financial profile before setting your credit limit. Important factors can include your credit score, income, payment history, loans outstanding, and the limits on other cards you might have. Over time, a credit card company might offer to raise, or decide to lower, your limit, depending on how well you’ve been managing your credit card. Or, it might automatically raise the limit and simply inform you after the fact. You can also request a higher limit. For more information, read “How to Increase Your Credit Limit.”
Credit card companies may reduce your credit limit if they believe you have a high enough risk of not paying your total debt obligations in the near term. If a credit card company does reduce your limit, it is required to notify you in writing along with the reasons why. You may have the option to appeal a reduction, so it makes sense to give the card company a call if you want your credit limit restored.
Credit limits can affect your personal finances in various and sometimes unexpected ways.
Purchasing power: Yes, you can make those large purchases with a higher credit limit. But regardless of where your limit stands, it’s important to keep spending within your financial means. After all, unless you pay off your credit card balance monthly, on time and in full, you could end up paying high interest charges.
Credit score: Raising your limit can reduce your credit utilization ratio, potentially improving your credit score. However, some lenders see a red flag if the credit limit across all your cards is too high – for example, if it’s higher than your income.9
Debt: Some experts believe that, given human nature, higher limits may cause people to take on more debt. “High credit limits can … make prices seem relatively small, which in turn stimulates spending,” according to Psychology Today.10 The Fed analysis observed a supporting correlation: “from ages 20 to 40, for example, credit card limits grow by more than 700%, and yet utilization holds steadily at around 50%.”11 And yet, a separate Fed report showed that good credit decision-making is still possible, regardless of your credit limit, because 47% of Americans report always paying off their credit card balance in full every month.12
1 “Study: Why Swipe? American Credit Card Preferences and Habits by Generation,” The Motley Fool
2 The Consumer Credit Card Market, Consumer Financial Protection Bureau
4 “Credit Card Utilization and Consumption over the Life Cycle and Business Cycle,” Federal Reserve Bank of Boston
5 Credit Card Accountability Responsibility and Disclosure Act of 2009, Federal Trade Commission
6 The Consumer Credit Card Market, Consumer Financial Protection Bureau
7 “Can You Go Over Your Credit Limit?,” The Balance
8 “This is What Happens When You Go Over Your Credit Limit," MarketWatch
9 “Is It Possible to Have a Credit Limit That’s Too High?,” Investopedia
10 “Why We Overspend with Credit,” Psychology Today
11 “Credit Card Utilization and Consumption over the Life Cycle and Business Cycle,” Federal Reserve Bank of Boston
12 Report on the Economic Well-Being of U.S. Households in 2018, U.S. Federal Reserve