Credit limit

A credit limit is set by the lender, not chosen by you, and the lender can change it at any time in either direction. It is the top of a revolving account: you can borrow up to it, pay some or all of it back, and borrow again, with the balance rising and falling under a ceiling that stays put. The limit is a ceiling, not an amount of money you have; the money to repay whatever is borrowed under it still comes from your income, and the budget, not the limit, says how much of it you can afford to use. Most cards also carry a smaller cash advance limit inside the main one.

In a sentence

• "The card came with a $5,000 credit limit, and with $1,450 on it and a $300 hotel hold there is $3,250 left to use."
• "A credit limit is what the lender will let you owe, not what you can afford to owe; the budget decides the second."
• "After a year of on-time payments the issuer raised her credit limit from $5,000 to $8,000, and her utilization fell without her paying anything extra."

How it works

1. The lender sets the limit at approval from your income, your existing debts and your credit history, and states it in the account terms and on every statement.
2. Every purchase, fee and interest charge raises the balance toward the limit, and every payment lowers it. What is left under the ceiling, after the current balance and any pending authorizations, is the available credit.
3. A charge that would take the balance past the limit is usually declined. When an issuer lets one through, the amount over the limit is added to the next minimum payment, and the account reads as over its limit on the credit report until the balance is back under.
4. Cash advances have their own, lower limit, a portion of the main one, and are charged at a higher rate with no grace period. See Cash advance.
5. The lender can raise the limit, on request or on its own after a stretch of on-time payments, and can lower it or close the account, sometimes without warning, when the card sits unused or the risk picture changes.

Available credit = credit limit − current balance − pending authorizations

An example

A card with a $5,000 limit, in the middle of a billing cycle.

If the statement closes with the $1,450 balance, the card reports 29% utilization, just under the common 30% guideline. A limit increase to $8,000 with the same balance puts available credit at $6,250 and utilization at 18%; a $1,000 payment before the closing date does more, 9%, from the other side of the fraction. The hotel's $300 hold counts against the available credit for days after checkout even though it never becomes a charge, which is why a card close to its limit gets declined for a purchase the posted balance says should fit.

Why it matters

The limit sets the bottom of the credit utilization fraction, so it shapes a credit score as much as the balance does: the same $1,450 is 29% of a $5,000 limit and 18% of an $8,000 one, and a limit cut can push a steady balance past the 30% guideline overnight. It also decides whether a card can absorb an emergency: available credit is not an emergency fund, but a card with room is a cheaper bridge than a card without. The mistake the limit invites is reading it as permission. A limit is sized to what the lender is willing to risk, not to what the budget can repay, and a card used up to its limit at a card APR is the most expensive money most households ever borrow.

Credit limit versus available credit

The credit limit is the ceiling; available credit is the room under it right now. Available credit is the limit minus the current balance and minus any pending authorizations, the holds a hotel, a fuel pump or a rental agency places before the final amount is known, so it is always at or below the limit and it changes every day. The limit changes only when the lender changes it. A declined card with a balance under the limit is usually a hold doing its work, and the room comes back when the hold releases, usually within days. See Credit utilization for the ratio the limit and the balance make together.

Common questions

Is a credit limit the same as available credit? No. The limit is the fixed ceiling; available credit is what is left under it after the current balance and any pending holds, so it moves with every purchase and payment while the limit stays where the lender set it.

What is a good credit limit? There is no right number on its own. The useful measure is the limit against the balance you normally carry to the statement: a limit large enough that a typical month stays well under 30% of it does its job, and a limit large enough to tempt more spending does not. Two cards with modest limits and small balances read better than one large limit used to the top.

Should I ask for a higher credit limit? If your spending will stay the same, a higher limit lowers your utilization and adds room for an emergency, and issuers grant increases readily after a stretch of on-time payments. Ask whether the request is a hard inquiry, which some issuers run and some do not. If a higher limit would become a higher balance, leave it where it is.

What happens if I go over my credit limit? The charge is usually declined at the register. If the issuer lets it through, the amount over the limit is added to the next minimum payment, and until the balance is back under the limit the card reports as maxed out, which is the worst utilization there is.

Can the lender lower my credit limit? Yes, at any time, and it happens to cards that sit unused and across the board when lenders pull back. A cut does not change the balance, so utilization rises at once: $1,450 on a limit cut from $5,000 to $2,000 is 72.5%. Using every card a little keeps the limit in use and the account open.

Go deeper

• How to budget with a credit card without overspending budgets the purchase on the day it happens and pays the statement in full, so the limit never becomes the plan.
• The Credit card payoff calculator shows how long a credit card balance takes to clear at the payment you make now, what the interest costs, and what to pay each month to be done by a date you choose.