Take a few minutes to learn about several key credit card limit definitions. Discover how banks determine the balance ceiling for each individual, and what happens when you attempt to spend over the cap.
Getting a limit increase is much easier when you know the basics and understand how the process works. Focus on improving your credentials and watch the banks boost your spending power without having to ask.
In addition, avoid surprise reductions by staying current on payments and using the account for at least one purchase each month.
What is a Credit Card Limit?
A total credit card limit is the maximum balance you can have on the account at any time. The bank will publish this figure when you first open the account and on each monthly statement that you receive.
Read your card agreement for the exact definition.
How is your credit limit determined? Banks use data mining to choose the optimal upper bound. They weigh possible extra income (interest and interchange fees) against potential losses from default. Issuing companies use three main data sources to make these predictions.
- Data about your behavior with other lenders
- Consumer credit report
- FICO or Vantage scores
- Information that customers provide on applications
- Employment history
- Income amount
- Monthly housing payment
- Data captured through account usage
- Percentage of balance paid each month
- Types of merchants patronized
What happens if you spend over your credit limit? This scenario plays out less today than it did in the past. One of two things may happen if you charge above the preset threshold.
- Most banks will decline transactions that cause you to spend over the limit. The point of purchase terminal or reader will return a “Do Not Honor” code.
- Some banks will accept the same transactions but impose an over limit fee. The Credit Card Act of 2009 places a legal cap on the amount and frequency of these fees.
- $25 for 1st offense
- $35 for 2nd instance
- Other banks will approve the same transaction and treat the amount as immediately due. You lose the grace period for that purchase.
Keep in mind that other charges can swell your balance above the maximum. These include interest, and fees for late payments, cash advances, and overdraft protection.
The available credit (open to buy) on a credit card means the difference between the limit and the balance and any temporary holds on the account. The cardholder can spend up to the open to buy amount before reaching the ceiling during any billing period.
Making a payment at the end of any billing period increases the available credit. The outstanding balance drops when the bank posts the payment to your account. People with a negative balance would have an open to buy that exceeds the limit.
For example, open to buy is the key metric when renting a car. The rental company needs to know the bank will approve any extra charges at the end of the lease term.
The credit card cash advance limit means the maximum amount of cash the account holder can withdraw from an ATM or over the counter at a bank in a given billing cycle. The cash advance limit is always much lower than the total limit because it is a subset.
Cash advances are the primary tool used by identity thieves to perpetrate fraud. Therefore, banks set a lower threshold for these transactions in order to minimize losses and protect profitability.
How to Get A Credit Card Limit Increase?
How do you get a credit card limit increase? Demonstrate the types of behaviors that fit the profile of a future profitable customer. Document your improved performance in at least one of the three main information categories that banks tap into to determine the threshold.
- Consumer reports and scores – communicated by other lenders
- Application information – communicated by the consumer
- Account usage – captured and stored by banks over time
Once you make these changes to your own behavior, the bank may grant your wish automatically, or you can provide the missing data when you make a request yourself.
Does a credit limit increase result in a hard inquiry that may hurt your score? In most cases, the answer is no. The process usually results in a soft inquiry or none at all. The banks often do not need to pull a copy of your consumer report in order to make a decision.
Banks routinely receive regular (monthly) score updates from the bureaus without explicit permission from customers. This is a permissible purpose under the Fair Credit Reporting Act (FCRA). It is standard practice to run periodic account review programs in order to adjust underwriting decisions.
The furnishing bureau logs a soft inquiry to reflect that the consumer did not initiate the transaction. The bureaus that did not furnish the information do not log any inquiries (soft or hard).
Why do banks increase your credit limit without asking? They may automatically raise your threshold after they become confident that you will behave like a profitable customer. They can make this determination independently of input from the customer using data from the bureaus and their internal systems.
- Improvement in your FICO or Vantage score. Banks detect score changes each month via the periodic updates from the bureaus.
- Longer histories on account behaviors provide greater predictive confidence. Banks have zero insight into how you will behave during the initial application process.
- A higher percentage of balance paid each month means lower default risks. Banks will loosen the reins most for customers who pay in full each month (transact).
How to Request
How do you request a credit limit increase in a manner that leads to a yes? Present a compelling argument when you speak to the customer service person. First, ask at the right time, but not too frequently. Then update the bank with information only you would know: changes to your income or employment situation.
When to Ask
You should ask for a credit limit increase when at least two of the three main information sources points to greater profitability in the future.
- Improvement in your consumer credit score (FICO or Vantage)
- Increase in income or longer job tenure with one employer
- Account usage shows at least 6 months of positive behaviors
- Consistently pay more than the minimum payment each month
- Avoid making charges with high-risk merchants (casinos, pornography, etc.)
A better income and/or employment picture should always be in the mix – since the bank will never find out – unless you tell them!
How Often to Ask
Ask for a credit limit increase as often as you can provide new information that leads to a rosier forecast about your future behavior.
- Request an increase as often as you get a pay raise at work. The extra income shows a better ability to handle more spending.
- Space any account usage-based requests at least six months apart. The bank needs at least six months of these data to make a statistically significant evaluation.
How to Avoid Credit Limit Reductions
How do you avoid credit card limit reductions? Banks also set these thresholds in order to minimize losses from default. Non-payment on one bad account wipes out the income from twenty good ones. Therefore, keep your credit score in the good range and keep your account active and in good standing.
Banks will sometimes reduce your credit limit without warning because your credit score suddenly drops. Your risk score provides the issuer with a picture of how you are performing with other lenders.
A sudden score drop is an early warning signal that you are having financial difficulties with other lenders. The issuing bank could be the next to suffer non-payment. Therefore, they lower your spending power before the problem spreads.
Keep your score healthy to avoid sudden limit decreases.
Banks will also lower your credit limit without warning because of the way you manage usage on the account. Steer clear of both ends of the spectrum in order to maintain the status quo.
- Make payments early or on-time every month. Delinquent cardholders do not behave like profitable customers. Avoid having your limit chase the balance once you finally begin paying down what you owe.
- Keep using the account by making small charges every month. Set up an auto-pay for a recurring charge such as your phone bill. Avoid a credit limit decrease due to inactivity. Remember that banks use activity data to determine the threshold.