Understanding Credit Card Limits and How To Increase Your Credit Limit
What are credit limits, how do they work, and can you increase your credit limit? Today, our review of credit card spending limits looks at these questions to help give you a better understanding of credit. Each bank has its own rules and processes, but there are some general concepts that apply across the board. Here’s how credit works and how to increase your credit limits where possible.
What Is Credit?
Broadly speaking, credit is the ability to borrow money for various reasons, understanding that you’ll pay it back later. You can get credit for personal and business purposes. Credit can be obtained for medical procedures, buying a house, buying a car, credit cards, etc. We’ve previously talked about how your credit score is built. Understanding how it’s built helps you know how to increase your score, which means lenders will be more willing to loan you money or extend credit. It also means they’ll give you credit at better rates. Getting a loan rate to reduce by 1% can mean saving thousands of dollars, depending on the amount borrowed and time of repayment.
Credit Limits On Credit Cards
This leads to ‘credit limits’ on credit cards. A credit limit is how much you can spend on a credit card. After that, you must pay some of what you owe and reduce the amount borrowed on the card before you can spend more. If your credit limit on the card is $10,000, you can’t spend more than that on the card. There are penalties for going past that, as well.
Determining Your Credit Limit
Different banks have different rules. Each has its own application rules, and they will determine how much credit they are willing to extend to you. Most times, your annual income and credit score are the main factors in determining this. The more money you make, the higher the limit they’re willing to extend to you. Why? Because they believe you can pay it back. If you only make $40,000 per year, they won’t be willing to give you $50,000 in credit. Why? You’re not likely to repay them. Through their internal processes, each credit card you open with a bank will have a credit limit–a maximum limit of how much you can charge on that credit card. Until you pay off part of your bill, you can’t spend any more on the card.
What Is “Cycling”?
You may have heard this term floating around, but banks tend to not like this. Not at all. “Cycling” your credit works like this. Your credit card has a limit of $10,000. That is supposed to be a monthly limit. If I spend $9,000 on my card this week, pay it off, and then spend another $9,000 next week, I never broke the $10,000 limit, right? However, I actually charged $18,000 this month, which breaks the “limit”, because the limit is for each month during your billing period. I cycled or “recycled” my credit limit. Include cycling your credit limits among the list of things that lead to credit cards being shut down by banks.
How To Increase Your Credit Limits
Now that we know how credit limits are determined, there are a pair of strong reasons why you might want to increase your credit limits.
- A big purchase coming up, and it’s higher than the credit limit on your card.
- More ‘available credit’ and a better ‘credit usage rate’ will increase your credit score.
With most credit card issuers, you can overcome the ‘large purchase’ issue with a phone call. Let them know you want to make a one-time large purchase, and you could get pre-approved for this. For us, the latter reason is more important. We want to build our credit score, in order to get approved more often, more easily, and for better credit cards to earn more points and miles. Getting a credit limit increase can bump your score up a few points.
How To Increase Your Credit Limit With Each Bank
Here’s how to request a credit limit increase with the most common credit card issuers:
- American Express – Request a credit limit increase online. Your card must be more than 60 days old.
- Bank of America – Instructions are here. Sign into your account, choose the card you want, and then click on “Request a credit line increase”.
- Barclays – Apply online. Log into your account, select “Services” and then “Request Credit Line Increase”
- Capital One – Capital One has a FAQ section here, and the application can be done online here.
- Chase – Unless you receive a special offer, Chase requires you to call them. Call the number on the back of your credit card to request a credit limit increase.
- Citibank – Apply online here.
- Discover – Apply online. Log into your account, then click “Manage” in the top menu. Under “Credit Options” click on “Credit Line Increase”.
- U.S. Bank – They have a FAQ here. After logging in, choose “Customer Service” in the main menu. Go to “Self Service” and then “Request Credit Limit Increase”.
- Wells Fargo – Their FAQ here says to call 1-800-642-4720. You could also call the number on the back of your card.
A Warning
Doctor of Credit has a great list of bank policies regarding credit inquiries during requests to increase your credit limit. While increasing your credit line on a credit card can improve your score by improving your utilization rate, that will take a month or 2 to reap the benefits. If you get a “hard pull” or inquiry on your credit report, the 5 or so points your score will drop from that can be immediate. Make sure to always consider the negatives along with the positives.
Final Thoughts
You should now have a better understanding of how banks set credit limits and how to increase your credit limit on a credit card. We talked about when it can make sense to do this and then how it’s done when the time arrives. If used advantageously, increasing the credit limit to prepare for some big spending (think Black Friday & Christmas sales for people who buy & resell) or simply to aid your credit score can make sense. Hopefully now you know more about credit limits and how to use them to your benefit.
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Excellent Article!