If you're someone who likes to compare credit scores with your friends or partner, you may be interested in knowing how your credit limit stacks up.
What's considered a "normal" credit limit in the U.S.? While limits may vary by age and location, on average Americans have a total credit limit of $22,751 across all their credit cards, according to the latest 2019 Experian data.
Below, CNBC Select breaks down credit limits so you can make sure you're ahead in the rankings.
- What is a credit limit?
- How to get a higher credit limit
- Should you ask your lender to increase your credit limit?
- How does asking for a higher credit limit affect your credit score?
1. What is a credit limit?
Your credit limit is the maximum amount of money you can charge to a credit card before you face a penalty. A credit limit may also be known as a line of credit, credit line or spending limit. However it is referred to, the higher your credit limit, the more overall credit you have to rely on.
2. How to get a higher credit limit
Beyond proving a solid or steady income, you can usually get an increase on your credit limit by raising your credit score. Lenders typically set higher card limits for customers who have good or excellent credit scores.
Of course, it's also important to raise your credit score so you receive the best rates and can qualify for credit cards with better rewards programs. Some easy tips to improve your credit score include making on-time payments, paying your balance in full and not opening too many accounts at once.
If you're building credit, secured cards, such as the Discover it® Secured Credit Card, are often your best option. Once you work your way up from fair to good or excellent credit, you may qualify for cards with generous welcome offer bonuses and robust rewards programs, such as the American Express® Gold Card and the Chase Sapphire Reserve®, two of CNBC Select's top-rated rewards cards. Terms Apply.
3. Should you ask your lender to increase your credit limit?
For some people, asking for a credit limit increase may be a good idea, but for others it may not be. First, consider why you are requesting the increase. If the reason is to lower your credit utilization rate, asking may make sense. But if the reason is to access additional funds when you don't have a plan for paying off that debt, requesting an increase may not be the best move for your financial health.
Your credit utilization rate is the amount of credit you're using compared to the amount of credit you have available. So, if you have an $800 credit card balance and you have a $2,000 credit card limit, your CUR is 40%:
($800 / $2,000 = 0.4 X 100 = 40%)
Experts recommend keeping your utilization rate below 30%.
If you're looking to improve your credit utilization rate "paying down the existing balance on a card is usually a better approach than asking for a credit limit increase," Rod Griffin, Experian's senior director of consumer education and advocacy, tells CNBC Select. "Paying down balances reduces your debt load, does not create other issues that may have a negative impact on scores and usually leads to faster, longer lasting improvements in credit scores."
If you do decide to ask for a credit line increase, be prepared to answer some questions. Card issuers typically ask for your current annual income, employment status and your monthly rent. And while you can sometimes apply for an increase on your card issuer's website, you'll likely have a better chance of being approved or finding out more information if you call and speak to a representative.
4. How does asking for a higher credit limit affect your credit score?
As long as you are responsible with how you use your credit card, an increase in your credit limit should reduce your credit utilization rate. And the lower your utilization rate, the better your credit score in the long run.
That said, any time you make a change to your credit history, such as opening a new account or increasing your credit limit, you may see your credit score dinged temporarily.
"Asking your lender to increase your credit limit could result in a hard inquiry on your credit report," Griffin says. "While the impact to credit scores due to an inquiry is minimal, applying for an increase on multiple accounts within a short period of time may result in multiple inquiries, which could cause a temporary dip in scores."
Keep in mind that you should be wary about requesting credit limit increases if you're planning to make a major life decision, such as applying for a mortgage. Check with your card issuer first to see if your credit report will be pulled.
For rates and fees of the Discover it® Secured Credit Card, click here.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
As a seasoned financial expert with a deep understanding of credit systems and personal finance, I'll delve into the concepts covered in the article to provide comprehensive insights.
1. Credit Limit:
- Your credit limit is the maximum amount you can charge on a credit card before facing penalties. It's also referred to as a line of credit or spending limit.
- A higher credit limit provides more credit to rely on, impacting your overall financial flexibility.
2. How to Get a Higher Credit Limit:
- Raising your credit score is key to obtaining a higher credit limit.
- Lenders favor customers with good or excellent credit scores.
- Building credit through responsible practices, such as making on-time payments, paying balances in full, and avoiding opening too many accounts simultaneously, contributes to a higher credit score.
- Secured cards, like the Discover it® Secured Credit Card, can be beneficial when initially building credit.
3. Should You Ask for a Credit Limit Increase:
- Requesting a credit limit increase may be advantageous for some but not for others.
- If the goal is to lower your credit utilization rate (CUR), it may make sense.
- CUR is the ratio of credit used to the available credit, with experts recommending keeping it below 30%.
- If seeking a credit line increase, be prepared to provide information on your income, employment status, and monthly rent.
- Paying down existing balances is often recommended as a more effective approach to improving credit utilization than requesting a limit increase.
4. Impact on Credit Score:
- Responsibly managing a higher credit limit can reduce your credit utilization rate, positively affecting your credit score.
- However, any change to your credit history, including a credit limit increase, may result in a temporary dip in your credit score.
- Requesting a credit limit increase could lead to a hard inquiry on your credit report, but the impact is typically minimal.
- Multiple inquiries within a short period may have a more noticeable effect on your credit score.
- Caution is advised when seeking credit limit increases, especially if planning significant life decisions like applying for a mortgage.
By understanding these concepts, individuals can make informed decisions regarding their credit limits, working towards financial health and improved credit scores.
