What Is a Good Credit Limit?
When you apply for a credit card and get approved, you will get a credit limit. However, as you may be wondering, what is a good credit limit to have?
A credit limit is the maximum amount of money you are allowed to charge on your card before there is a penalty. Credit limits can also be called spending limits or a credit line. Whatever it is called, the higher the limit, the more credit you can rely on.
How Is Good Credit Limit Determined?
In order to determine what is a good credit limit, you need to know how credit limit is determined.
Your credit limit and what is a good credit limit for you are going to be based on what the issuer thinks you can repay responsibly, determined by your current credit score and income. When you are applying for a credit card and getting an initial limit, or asking for an increase, there will be factors including your credit score, monthly income, monthly mortgage or rent, existing credit balances and lines, employment history, and address history. Your monthly cash flow and credit score are going to be two of the biggest factors when it comes to determining your credit limit. Two people that have the same credit score may still get different credit limits based on reported expenses or income. The typical rule of thumb is the more money you earn, the higher the credit limit.
The income is usually self-reported and a company usually won’t verify it. When you apply for a larger loan, such as a mortgage, the bank does ask for proof of income, such as pay stubs. Since credit limits are usually lower the issuer isn’t likely to go through the trouble of asking you to prove income with documentation. You are going to be responsible for paying the credit card regardless of your income so it’s usually not in your best interest to lie about your income on your credit application.
The type of card you have can also help determine your credit limit. Credit cards will have their own set of guidelines and rules that sway the credit limits they set. Some cards may just have set limits and others have an established range that you as the cardholder will fit into based on your financial history.
What Is the Average Credit Limit?
What is considered normal for the U.S. can still vary on location and age, making it harder to answer the question what is a good credit limit. However, the average American has a total credit limit of $22,750 across all their different credit cards. On average, the better credit score you have then the higher the credit limit will be. If you have a sub prime credit score then the average credit limit can be about $11,000. A super prime credit score is usually at least 750 but usually higher than 800 and these individuals usually have 10 years of great credit history. The average credit limit for a new prime credit card is around $7,000. These prime credit cards have scores that are typically between 740 and 800. Sometimes, individuals can get this with a score of high 600s. For a sub prime score and a score that is in the mid 600s or lower, the average limit is $3,500.
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Your First Credit Limit
When it comes to what is a good credit limit, it helps to know that your limit may be low when you first apply for a card. Since credit history can be a big factor in your credit limit you will have a better chance of getting approved for a bigger limit if you have a better history of managing credit well. If you are a brand new credit card user then you don't have this history built up. The credit issuer isn’t sure of how much credit you can handle responsibly so you get started off with a smaller limit.
There are different tips for managing a low credit limit. It’s actually better to start small until you are used to handling credit so you shouldn’t be disappointed by your first credit limit. It can actually help you keep from overextending yourself and getting into too much debt. As you show that you are using your credit card responsibly and paying your bills on time, you will then be able to qualify for a higher limit. Some issuers will also automatically increase your limit after you make your payments on time for several months. Others will only increase the limit when you request it. Wait until you have made at least six months of credit card payments on time before you apply for a credit limit increase.
If you are worried that you won’t get a big credit limit on your first card then you could apply with someone jointly who already has good income and an established credit history. Another option you can pursue is applying for a secured credit card. This means you place a security deposit for the amount of credit you want. For example, if you make a $1,000 security deposit then you have a $1,000 credit limit. Your security deposit is returned to you as long as the account is in good standing. When you start with a bigger credit limit and are responsible while managing it then you can get approved for an unsecured card with a higher limit. You won’t be able to touch your security deposit until you close the credit card.
Below you can take a look at various credit card options and pick one that works best for you:
How to Get a Higher Credit Limit
If you know what is a good credit limit, you may be curious about getting a higher credit limit. You will usually have to prove that you have a steady and solid income. However, you can also usually see an increase in your credit limit once you work on raising your credit score. A lender will usually set a higher credit limit for a customer who has a good or excellent score. Not only is it necessary to raise your credit score for a higher limit but it can also allow you to receive better rates and can allow you to qualify for different credit cards, some of which have better rewards. In order to improve your credit score, you should make your payments on time, pay your balance in full, and not open too many accounts close together. If you want to build up your credit in order to get a higher score, you may want to consider a secured card.
Should You Ask for a Higher Credit Limit?
After you know what is a good credit limit, you may want a higher one. For some individuals, asking for an increased credit limit can be a good idea but for others it’s not. Before you ask for a higher credit limit, consider why you want the increase. If the reason is to help lower your credit card utilization rate, asking might make sense. Your credit utilization score is the amount of credit you are currently using compared to the credit you have available. It’s recommended that you keep your utilization rate below 30%. You can also work to keep your credit utilization rate lower by paying down your existing balance instead of asking for a higher limit. When you pay down your balance, it reduces your debt load and doesn’t create any other issues for you.
However, if the reason is to just have additional funds when you don’t currently have a plan to pay off your debt then it may not make sense for your financial health. If you do want to increase your credit limit and ask for it then you will need to answer some questions. You will usually be asked about your annual income and employment status. You may be able to apply for this increase on the issuer’s website but you may have a better chance of being approved if you call.
You can Avoid a Credit Score Decline With Higher Limit
Another benefit of asking for a higher limit is to avoid a credit score decline. If you are looking to increase your available credit then you likely want to spend more with the card. This could be for different reasons. Perhaps you just want to put some more of your everyday spending on the card, such as groceries, in order to get rewards. You may just have a big purchase coming up that you want to use the card for. If you need extra credit then you can either take out a new card or ask for an increased limit. Taking out a new card can seem like a good option, especially with an attractive sign-up bonus, but it might not be the right choice. When you get a new card, keep in mind that your average length of your current credit decreases, which is a statistic that makes up part of your credit score. In this case, you may be better off asking for an increased limit on a card you already have.
How to Ask for a Higher Credit Limit
If you have already made the decision to ask for a higher credit limit and know what is a good credit limit then you should figure out how to ask for it to minimize your chances of being rejected. The timing of your request is going to be important. Think about how long the account has been open. If you have just gotten this credit card then you want to establish some account history before you ask. It may also not be a good time to ask for an increased limit if you are behind on your payments or haven’t been good about paying your bills on time. You need to establish you have a good track record with bill paying if you want a higher limit. Then once you have an established history with the card, you can go ahead and contact the issuer.
Besides being asked questions, you may also want to explain why you want and need the increase in your credit limit. You should be honest and use this as an opportunity to talk yourself up and make yourself look good. If you have a good credit score or have been a long time cardholder then make sure that you mention that. Card issuers know there are other credit card companies out there so if you are a good borrower, they do want to keep you and not have you go with someone else.
Why Didn’t You Get a Higher Credit Limit?
If you know what is a good credit limit and you do apply for an increase but don’t get it then you may be wondering why. Your credit limit can be lower than you expected because of too many recent credit inquires, too high of a debt-to-income ratio, or too many accounts open with the same bank. Even if you think you have excellent credit, you still may have not gotten the credit limit increase you wanted or the initial credit limit when you apply for a new card since there are many different factors.
An example of how this plays out can be helpful with different factors involved. Jim and John both earn an income of $100,000 a year. Both credit scores are 750 and both don’t have any negative marks or recent credit inquires. The only difference between Jim and John is the level of debt. Jim doesn’t have any debt and only pays about $450 in rent and hardly ever uses his credit cards, even though he does have open ones. However, John has a $5,000 balance on his credit cards and pays $1,500 for his mortgage. Even though John pays off the credit card balance in full, the balance does still show up on his credit report as debt. When both of the applicants apply for a new credit card, they are approved but Jim gets $9,000 for his credit limit and John only gets $3,000.
Having multiple cards with the same issuer can also be an issue. It is possible to have several cards with one bank but then the more cards you have, the lower your limit on each card may be. This is because even though the cards are different, the bank is the same and at some point the bank will look to limit exposure in case you aren’t able to pay them back.
Does a Higher Credit Limit Affect Your Score?
Once you know what is a good credit limit, you should also know how the credit limit affects your score. If you are responsible with how you are using your credit card then an increase in a credit limit should help reduce your utilization rate. The lower your rate then the better your score is going to be in the long run.
However, when you do make changes to your credit history, such as increasing your credit limit or opening a new account, you can see your credit score go down slightly. While this is temporary, it can still be a problem. If you ask your lender to increase your credit limit then this could mean a hard inquiry on your credit report. The impact is likely minimal but if you do apply for an increase within a short period of time on multiple accounts it could mean multiple inquiries, which will definitely drop your score. You should be careful to request a credit limit increase if you are making big financial decisions, such as applying for a mortgage. See if your card issuer will view credit report or reports in order to check to see if you qualify for a credit increase.
Final Thoughts
When answering the question of what is a good credit limit, there really is no right answer. On the other hand, there is also no bad credit limit. It will depend on your use of the credit card. However, there may be certain circumstances where it makes sense to ask for an increase in your limit. If you are going to ask for an increase, you have to make sure you do it at the right time in order to increase your chances of being approved.