Credit Card Limit: What is It and How Do Banks Determine It?
By: Venus Zoleta
Published on: September 11, 2019 . Last updated: October 6, 2020 Category: Credit Card
The credit card limit is one of the most important things to understand when you’re applying for a card. Your credit limit affects how much you can spend with your plastic card. Of course, you want to have the highest possible credit card limit because that means increased purchasing power.
But unfortunately, you’ll never know how much your credit limit will be until you’re approved for a credit card. The closest you can get to predicting your credit card limit is finding out how banks arrive at this figure. This will give you an idea of whether you’ll get a high or low credit limit.
While you’re shopping around for a credit card, get to know what a credit card limit is and how it’s calculated.
Table of Contents
- What is a Credit Card Limit?
- How Do Credit Card Limits Work?
- How Do Banks Set Your Credit Limit?
- Is It Good to Have a Large Credit Limit?
- How to Increase Your Credit Card Limit
- Final Thoughts
What is a Credit Card Limit?
A credit card limit is the maximum balance you can have on your card at any given time. It includes your purchases, finance charges, service and penalty fees, balance transfers, and cash advances. Put simply, it’s the total amount you can spend using your card. The higher it is, the more you can charge to your credit card.
If you own multiple credit cards, the bank may either set a credit limit for each card or a single limit across all your cards.
How Do Credit Card Limits Work?
Unlike loans with fixed amounts and terms, the credit limit on a card isn’t set over a span of time. This means you can keep on using your card as long as you pay your credit card bills regularly and stay within your credit limit.
When you reach your credit card limit, the issuing bank may either decline your succeeding purchases with your card or charge you an overlimit fee until you’ve paid off at least a portion of your balance.
How Do Banks Set Your Credit Limit?
On a secured credit card, you can control your credit limit because it’s equal to 80% to 100% of your security deposit (which serves as your collateral) to the issuing bank.
As for unsecured or traditional credit cards, it’s a lot more complicated. Credit card providers decide how much credit limit customers can have on their credit cards. But banks don’t do it randomly.
3 Factors That Affect Credit Card Limit
Banks conduct credit evaluations to decide how much credit to give to each applicant. They consider a variety of factors to get a full picture of your financial status, accurately determine your creditworthiness, and come up with a reasonable credit limit.
1. Credit History
Your credit history shows how disciplined you’ve been in managing your debts and maintaining a good credit score.
If you’ve been a good borrower, you’re likely to get a higher credit card limit. But if your credit history is poor (e.g., late and missed payments, exceeding the credit limit on other cards, etc.), banks will give you a lower credit limit.
Having no credit history will also lead to a low credit card limit because banks have no credit data to use as a basis for calculating the credit limit.
Your salary, benefits, and other income sources, as indicated in the income documents (payslips, income tax returns, certificate of employment, etc.) you’ve submitted to the bank, are also used to determine your credit card limit.
Having a high income raises your chance of getting a high credit card limit. But your income alone doesn’t guarantee that the bank will approve a high credit limit for you. Your level of debt and of course, your credit history, come into play as well.
3. Debt-to-Income Ratio
Banks check your debt-to-income ratio to help them decide the credit card limit they’ll give to you. They look at your loans, mortgage, and other credit cards to know how much of your income is needed to pay for your debts.
To compute your debt-to-income ratio, get your total monthly debt payments and divide them by your gross monthly income.
You’d want your debt-to-income ratio to be low (ideally 12% of your income or lower) because this results in a high credit card limit. If yours is high, you’re likely to get a low credit limit even if your income is high.
Is It Good to Have a Large Credit Limit?
A higher credit card limit isn’t for everyone. It may either work for or against you, depending on your spending habits as well as financial status and discipline.
People who are disciplined in their spending and whose income affords them to pay their monthly credit card payments are the ones who benefit the most from a credit card limit increase.
Do you really need a credit card limit increase? Before you request an increase in credit limit, consider its pros and cons first. Think about how it will affect your finances both in the short and long term.
Advantages of Credit Card Limit Increase
1. Improved Credit Score
This advantage will work only if you don’t overspend with your card and you can afford your monthly credit card bill.
Having a large credit card limit lowers your credit utilization ratio (how much you owe on your card compared to your available balance), which leads to an increase in your credit score.
For example, if you have a PHP 20,000 credit limit and you’ve spent PHP 10,000 using your card, your credit ratio is high at 50%. But if your credit limit is increased to PHP 40,000, your ratio becomes only 25% with the same amount spent on your card.
A high credit score matters, especially if you have no credit history yet or have a bad credit score. It’s what banks and lenders use to evaluate your capacity to repay a loan or credit card, which will result in an approval.
2. Greater Purchasing Power
An obvious reason to go for a higher credit card limit is the increased spending potential that comes with it. You can buy a gadget or appliance you need (with the added flexibility of paying in monthly installments) without having to worry about maxing out your credit card.
A large credit limit is especially helpful during an emergency, like when a family member gets hospitalized and you have no access to cash for paying the medical bill.
3. Higher Potential for Earning Credit Card Rewards
With a greater spending power, you can use your credit card for more purchases (as long as you can afford them) and maximize the rewards points you earn.
Disadvantages of Credit Card Limit Increase
1. Higher Monthly Credit Card Bill
If you receive a credit card limit increase, there’s the temptation to spend more and max out your card. Your total amount due will get higher, which your budget cannot afford. You’re likely to fail to settle your balance in full, paying only the minimum balance or skipping payments.
2. Higher Risk of Credit Card Debt
A large credit limit and lack of financial discipline are a bad combination. This can put you in a rough financial patch if you can no longer afford your monthly credit card payments. Your unpaid balance will increase month after month (due to interest charges), and you’ll end up with a large amount of debt.
Do you tend to splurge often? Reconsider your decision to get a higher credit limit.
How to Increase Your Credit Card Limit
Unhappy with your current credit limit? The good news is that you aren’t stuck with it forever. Here are the different ways you can try to get a higher credit card limit.
Manage Your Credit Card Responsibly
Banks review their clients’ credit and adjust credit card limits accordingly. If you’ve been a responsible borrower for several months (like if you pay off your monthly balance and avoid maxing out your card), your credit card provider might increase your credit limit, which will show on your statement of account.
Request the Bank to Increase Your Credit Limit
However, not all banks automatically raise credit card limits. If that’s the case with your credit card provider, you’ll have to apply for a higher credit limit by calling the bank’s customer service hotline. The bank will ask you to update your income and provide necessary supporting documents so that it can properly assess your current credit limit.
Certain banks like BPI allow clients to request a credit card limit increase through their online banking account. On the BPI Online Banking facility, you can access its Credit Card Services feature to ask for a higher credit limit.
Why is My Credit Limit Increase Denied?
Several factors cause banks to decline a client’s request for a credit card limit increase. If yours is denied, you might have a poor credit score, or your income is too low to be eligible for the increase.
When was the last time you received a credit limit increase? You might have requested another increase too soon. Wait for a year before trying to ask for a change in your credit limit
Increase Your Security Deposit
If you have a secured credit card, all you have to do to raise your credit limit is to add more money into your holdout deposit with the bank. But before doing so, check with your bank for the exact procedure. Also, ask the bank about the maximum credit limit allowed on your card.
Have More Than One Credit Card
If your request for credit card limit increase is rejected, your other option is to get another credit card, either with your current issuing bank or with another provider like Citibank or HSBC. This will get you a higher total credit limit on all your credit cards.
While your actual credit card limit is unpredictable when you’re applying for a card, you can raise your chance of getting approved for a higher credit card limit. Improve your credit score, increase your income, and manage your credit cards responsibly.